Stocks and bonds are two popular forms of investment today. They are more profitable than saving accounts with flexible time and easy exchange.
Some beginners often wonder “Why is a high-quality bond typically considered a lower-risk investment than a stock?”
The following article will answer the above questions and related information about them. Keep reading for more details.
Why Is A High-Quality Bond Typically Considered A Lower-Risk Investment Than A Stock?
First, investors will know in advance interest rates, expected returns, and principal receipt dates when investing in high-quality bonds. The firm will pay the amount of interest periodically while the principal is received on the maturity date.
Meanwhile, stock investors will not know the exact time to recover their capital. Sometimes, they have to accept to sell at a loss to avoid losing more money.
In addition, when the company goes bankrupt, it will prefer the bond to pay before the stock because it belongs to the debt.
Equity and debt
A company or organization often issues stocks to raise equity when establishing or expanding its business. Investors can benefit from selling shares or receiving dividends when profitable.
A company or corporation that issues a bond is borrowing capital. After a certain time, it will repay the debt based on the previously committed interest rate. Usually, interest is paid periodically, and the principal is paid at the end of the period.
Capital gains and fixed income
Stock investors often profit by selling the difference in price to recover their capital and receive a profit. They can also receive dividends from the shares they are holding issued.
Bond investors make a profit by receiving pre-determined periodic interest. The frequency of each is equally varied, such as:
- Treasury bonds and notes: every six months until the next maturity
- Treasury bills: receive money only on maturity
- Corporate bonds: depending on the company, the period to receive periodic interest will be: monthly, quarterly, six months, or at maturity
You can also sell them at government or corporate authorized exchanges. Buyer and seller will negotiate the price between buyer and seller within the prescribed framework.
In a year, the company’s stock price can increase more than 10%, even double or triple. The number of money investors earn will sometimes be several times more than bonds.
Inverse correlation
In markets, these two investments tend to be an inverse correlation. When the stock price increases, the bond price will decrease and vice versa.
Because when it increases, more money will flow into it. Then, a decrease in bond demand leads to a fall in prices. In contrast, investors tend to look for a safer investment form when the stock market rises and falls. The demand to buy will increase; as a result, the price will increase.
The Risks And Rewards
Stocks
The risk of investing in stocks is that the selling price may be lower than the buying price. It means that you spend money buying the shares and lose more money to sell them.
A drop in value is often due to a company’s unprofitable business, market volatility, or worse, a manipulated price. These are often difficult to grasp, so investing in stocks also carries many high risks.
However, the return can be 10% or more, which is more than investing in bonds or saving bank accounts. Therefore, many investors accept taking risks to earn more.
Bonds
Reliability and safety are always guaranteed for treasury bonds. That is a stable interest rate and low risk. In parallel with it, the interest rate will be lower than conventional investments.
Meanwhile, corporate ones often do not have a specific interest rate and risk. It is divided into two main categories, investment-grade and high-yield bonds.
- Investment level: the company has a high credit rating, the risk is usually low, and the return is also low
- High yield: often considered junk bonds due to their low credit, high risk, but high returns to attract investment
The risk of the bond is the bankruptcy of the issuing company. At that time, the company will not pay the interest. Instead, it will quickly liquidate assets and return the principal to the investor, depending on financial viability.
Decide Which Investment Is Right For You
| Stock | High – quality bond | |
| Trade-off | High risk, convulsion, but yield higher returns | Low risk, stability, but yield lower returns |
| Time | Predict hard the rise or fall of the market to recover capital | Know exactly when receiving the interest and principal |
| At least budget | $500 – $1000 | > $1000 |
Conclusion
So the question: “Why is a high-quality bond typically considered a lower-risk investment than a stock?” got the answer.
Bond has a stable interest rate, periodic payment, and preferred pay before going bankrupt. Meanwhile, the stock is highly dependent on market fluctuations, even acquisitions of other large investors. However, it can be more profitable for investors than bonds with many risks.
Hopefully, this article helps you deeply understand these two investment forms and make the right choice to earn profit.
