Both stocks and bonds are common forms of investments used to generate cash flow. It’s important to understand their differences when implementing investment strategies. The appropriate use of each is unique to an investor’s risk tolerance, financial goals and time horizon.
As an investor, you can purchase stocks of a publicly traded company, which makes you a shareholder. As a shareholder, the value of your shares will change based on the value of the company and other market forces.
Compared to bonds, and taking into consideration historical performance, stocks are a riskier form of investment because your return is based on the market and the company’s performance, neither of which you can control. However, stocks offer more opportunity for growth and potentially higher returns.
When an investor purchases corporate bonds, the company is then in debt to the investor. A bond is used when the company wants to borrow from the general public to expand the company.
Bond certificate holders receive the principal amount of the bond when it matures. The investment component of a bond is the interest that is accrued and paid to the investor over the course of the bond’s life.
Historically, compared to stocks, bonds offer greater stability, which is a lower-risk investment. Credit quality of the bond is an important factor when considering risk tolerance and laddering your bond portfolio protects you against market yield curves. However, bonds typically offer lower potential for returns.