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Bond Market vs Stock Market – Which Do You Prefer?

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Introduction

 

 

Stocks and Bonds. They are considered to be the holy grail in terms of the world of investing – but what are they exactly? How are they any different? What are their similarities? Risks? Benefits? There are a plethora of questions that must be running through your mind as we speak as the financial terminology can be a little overwhelming at first glance – especially if you are now starting out. In this lesson, we will be providing you with the clarity you need to navigate the investing waters – as we take a greater look at the bond market vs stock market. As these will be the learning blocks as you continue your investing education here at Invest In Wall Street.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

Bond Market vs Stock Market

 

 

Income oriented investors might seek income from both bond coupons and stock dividends.

Bond coupons are interest payments made by bond issuers and stock dividends are payments made by corporations.

 

 

One difference between coupons and dividends is the frequency of payments.

Coupons are typically paid semiannually, or every six months – while dividends are usually paid quarterly, or every three months. However, the timing of the dividends is up to the company and dividends can be paid out infrequently, such as one-time special dividends.

The amount of income investors are paid also differs. Coupons are typically fixed payments, and investors generally receive the same amount every six months – while dividend payments can fluctuate based on a corporation’s financial performance.

This means that sometimes a corporation will raise a dividend payment if its financial performance improves and other times, lower the payment if its financial performance worsens – and it might even eliminate dividend payments altogether if its financial performance dramatically deteriorates after several quarters.

Along with fluctuating dividend payments, prices of dividend paying stocks also vary. Often, these prices change more frequently and to a greater degree than the price of bonds.

This is due to stocks historically volatile nature. But this increased volatility can work both ways – potentially making it advantageous to the investor.

 

 

For instance, suppose an investor buys 100 shares of a dividend-paying stock at $40. The stock pays a $0.50 dividend every quarter.

Let’s say the stock rises to $50 per share after one year. The investor would make $1000 on the price increase and another $200 on the dividend payment.

If the stock price were to fall to about $30, the investor would still receive the $200 in dividends but will lose $1000 due to the price change.

Obviously the loss due to the price change is far greater than the income received from the dividends.

Similar price fluctuations happens in bonds, but as we mentioned earlier, dividend paying stocks historically fluctuate a lot more than bonds. This presents a challenge to income oriented investors, who want to balance the risks and potential rewards of price changes with regular coupon and dividend payments.

One way to help overcome this obstacle is to align time horizons and risks tolerances with appropriate investments.

For instance, an income oriented investor with a short time horizon and low risks tolerance might invest more of their portfolio in bonds because they are less risky than dividend stocks.

Conversely, an income oriented investor with a long time horizon and high risk tolerance might invest more of their portfolio in dividend paying stocks.

And some investors might even seek a balance between the risks of bonds and dividend paying stocks by investing in both.

Investing in a mix potentially provides alternating payments and a blend of risks and potential rewards. But most income- oriented investors are still mindful of risk tolerances and time horizons when combing these two investment types.

Balancing the risks and the potential rewards of bonds and dividend paying stocks by holding a mix of both is just one way investors can help manage an income-oriented portfolio. Other ways include bond ladders and bond funds.

Regardless of which way you choose to manage your portfolio, its important to understand the risks and potential rewards in order to make a more informed decision.

 

 

Quick Recap

In Review…….

Stocks

  • Stock dividends are payments made by corporations
  • The timing of the dividends is up to the company and dividends can be paid out infrequently, such as one-time special dividends
  • The amount of income investors are paid also differs. Dividend payments can fluctuate based on a corporation’s financial performance
  • This means that sometimes a corporation will raise a dividend payment if its financial performance improves and other times, lower the payment if its financial performance worsens – and it might even eliminate dividend payments altogether if its financial performance dramatically deteriorates
  • Prices of dividend paying stocks also vary. Often, these prices change more frequently and to a greater degree than the price of bonds
  • This is due to stocks historically volatile nature. But this increased volatility can work both ways – potentially making it advantageous to the investor
  • Dividend paying stocks historically fluctuate a lot more than bonds
  • An income oriented investor with a long time horizon and high risk tolerance might invest more of their portfolio in dividend paying stocks

 

Bonds

  • Bond coupons are interest payments made by bond issuers
  • Coupons are typically paid semiannually, or every six months
  • Coupons are typically fixed payments, and investors generally receive the same amount every six months
  • Similar price fluctuations happens in bonds, but as we mentioned earlier, dividend paying stocks historically fluctuate a lot more than bonds. This presents a challenge to income oriented investors, who want to balance the risks and potential rewards of price changes with regular coupon and dividend payments
  • For instance, an income oriented investor with a short time horizon and low risks tolerance might invest more of their portfolio in bonds because they are less risky than dividend stocks
  • Other ways to invest includes bond ladders and bond funds

 

And those are they key differences between stocks and bonds, in case you were wondering. Stock and bonds are by far the two most popular investments that any one person can make – and it is generally a good idea to incorporate both asset classes in your investment portfolio. The main take away from this lesson is that stocks pay its investors in the form of dividends – in which the amounts vary depending on the financial performance of the company. Also note that stocks are more volatile, sensitive, and liquid compared to other stable assets such as bonds. Stock investing is very common and is a popular technique used by investors and traders alike – which leads to rapid growth and the potential to attain more revenue from your original investment (ROI).

Bonds, on the other hand, offer its investors coupons, which are fixed interest rate payments that are paid out twice over the course of a year. The amount never changes and you will continue to receive these payments until the bond itself has reached maturity – and at this point, principal will be returned to you. This investment is considered to be one of the safest and is used as a protection barrier if there should come a time that your portfolio takes a hit from the current market conditions. It should be noted that there are still risks involved in bonds, as no financial investment is risk free.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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