Mishari: Stock versus Bonds - Essay Example

Module Mishari: Stock versus Bonds What are stocks and bonds? Brady, Jason. Income Investing with Bonds, Stocks and Money Markets. New York: McGraw Hill, 2012. The source states that a bond is a type of debit which allows a company’s shareholders to act as its lenders rather than the borrower (Brady, 29). Stocks, on the other hand, are a type of ownership. They are indicators of participation in a corporation’s development. How do they work as investments? Kristof, Kathy. Investing 101 (Bloomberg). New York: Bloomberg Press, 2008. In today’s financial markets, stocks and bonds are the most common types of marketable securities. Investors who are risk-averse and are searching for a recognized periodic payment arrangement usually prefer to invest in bonds. On the other hand, investors who wish to risk more than is the case with bondholders, and are seeking to be included as joint partners in a corporation. Investors who are risk-averse and are searching for a recognized periodic payment arrangement usually prefer to invest in bonds. On the other hand, investors who wish to risk more than is the case with bondholders, and are seeking to be included as joint partners in a corporation. The source describes one disadvantage in investing in stocks being that they do not necessarily guarantee returns. Bonds, however, guarantee returns (Kristof, 17). The source also states that there are greater prospects of high returns with stocks, even though there is also the likelihood of losing money. Compare and contrast the advantages and disadvantages of each? Milevsky, Moshe. Are You a Stock or a Bond?: Identify Your Own Human Capital for a Secure Financial Future, Updated and Revised. New York: FT Press, 2012. The source describes stocks and bonds as being types of investment that give people the chance to invest their money in a specific business establishments in the hope of accruing handsome profits in future. Though both of these have a number of similarities, they also differ considerably in many ways. Both of these financial tools, in general, allow an individual to be able to invest in private or public companies, in the hope of being a future beneficiary through accrued profits. Stocks, which define the ownership shares in a corporation, are often the most favored by short time investor. One disadvantage in investing in stocks is that they do not necessarily guarantee returns. Bonds, however, guarantee returns. Therefore, there are greater prospects of high returns with stocks, even though there is also the likelihood of losing money. The source asserts that stocks are descriptive of a business’s shares (Milevsky, 84). When a shareholder uses his own money to buy stocks from the company, he is actually acquiring ownership of the business. When the business realizes any profit, a percentage of it is given to the shareholders. In the matter of bonds, when a person invests in them, he is actually lending money to the business in question with the expectation that the firm will reimburse the bonds' amount along with a pre-determined interest rate on a definite time period. According to the source, business establishments may need to raise capital in such ways in order to expand into different localities or new ventures. They also raise capital in order to fund their businesses. Usually, it is the developing businesses that favor issuing stocks to get the necessary finances as this facilitates their growth while helping them to avoid accumulating more debt. The larger corporations are more likely to prefer acquiring capital by availing bonds without giving the chance of ownership to additional shareholders. The Risks involved in making investments in stocks and bonds Bernstein, William. The Ages of the Investor: A Critical Look at Life-cycle Investing. New York: CreateSpace Independent Publishing Platform, 2012. The source states that for the most part, making such investments in a company always has different risks for the shareholder; but can also deliver handsome profits (Bernstein, 36). In contrast to bonds, stocks tend to fluctuate according to a business’s performance. Bond-holders, on the other hand, are not dependent on the status of the business because they are on a fixed return arrangement. According to the source, bonds can be affected by the market’s interest rate but are still perceived to be a safer investment than is the case with stocks. Stocks, however, can bring greater yields in the long run than bonds. Stocks, or shares, can be distributed in small denominations where shareholders are allowed to acquire as few or as any shares in a firm. Stocks are also transferable, which is something that permits an investor to be able to sell acquired stocks to another person by means of a stock exchange. Long-term versus short-term investment Thau, Annette. The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More. New York: McGraw-Hill, 2010. It is a recognized fact that long-term investment of capital in stocks can bring greater returns than investing in any other asset classes. The source affirms that most investors prefer to settle for bonds whenever the share market experiences fluctuations over an extended period as bonds can be changed according to the risk (Thau, 8). On the whole, it is better for investors to use capital in different assets while seeking to better understand how each type of investment affects the other in terms of risks and returns. According to the source, common stock stockholders, as part-time owners of the company, have the right to elect its board of directors, or even implement procedures such as the discharge of incompetent higher ranking executives. The investors in preferred stock, on the other hand, while not being able to exercise such prerogatives, are given priority in as far as the payment of dividends is concerned (Thau, 22). Moreover, stockholders have limited legal responsibility over company losses because they are not, for the most part, the ones that make the important decisions about how to allocate money to different stocks. Shareholders basically seek to profit from the occasional dividends that are declared by the businesses they invest in. In as far as bonds are concerned, the bondholder is provided with interest on standard intervals. Works Cited Bernstein, William. The Ages of the Investor: A Critical Look at Life-cycle Investing. New York: CreateSpace Independent Publishing Platform, 2012. Brady, Jason. Income Investing with Bonds, Stocks and Money Markets. New York: McGraw Hill, 2012. Kristof, Kathy. Investing 101 (Bloomberg). New York: Bloomberg Press, 2008. Milevsky, Moshe. Are You a Stock or a Bond?: Identify Your Own Human Capital for a Secure Financial Future, Updated and Revised. New York: FT Press, 2012. Thau, Annette. The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More. New York: McGraw-Hill, 2010. Read More