What is the difference between stocks and bonds?

There are two main asset classes: stocks and bonds. Sure, international stocks, real estate, and commodities have a share in most people’s portfolios too, but you really only need the two mentioned above to achieve a minimal level of diversification. Therefore, the question of stocks versus bonds is important to investors. It is also important to understand why you need both. Proper risk management requires that you own at least some of the two asset classes: stocks and bonds. However, how much of each you own will largely depend on your tolerance for risk and your time horizon. Young investors will want more stocks and older investors more bonds.

So what is the difference?

Bonds, on the other hand, are basically a loan, exactly the same as if you were to borrow money to buy a house or a car. When you buy bonds, you have the legal right to receive a set interest rate in return. This contractual right takes precedence over the rights of common shareholders; however, bonuses generally do not allow you to participate in company decision making. They also generally do not increase in value if the company increases its profits. However, they are much less risky than stocks.

Both stocks and bonds are issued by a company to raise capital. The shares represent a real capital investment in the company; an actual ownership interest in that company. When you own shares in a company, you have the right to vote for the members of the board, on important political decisions and, more importantly, the right to a portion of the residual earnings that may exist after the shares have been paid. invoices. If the company in question manages to increase its profits, the value of the stock will increase steadily over time along with the profits. And if the company sees fit to pay a dividend, ownership of shares makes it eligible to receive a share of the profits.

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