What are stocks and bonds? which is the one that you should get into? Let us look at what they are and how they differ.
Stocks are small sections of a company . When you buy a stock you are to some degree going to profit when the company profits and lose money if the company loses money. So if you buy a stock and the company their earnings double then chances are the price of your stock will also increase .
On the other hand if the company declares bankruptcy then the shares you bought in the company also become worthless. This means that you are taking a risky buying into these equities , but the payoff can be excellent .
A number of companies also pay a percentage of their earnings to their shareholders in the form of Dividends. These dividends are small payments that might be, monthly, quarterly, or annually depending on the individual company .
Some of the high dividend ETFs can give you a great return with dividends alone. Some investors will buy dividend stocks hoping that one day the dividends will be enough to support them.
Bonds on the other hand are different, when you buy a bond you are giving out a loan. Have you ever gone to the bank to borrow money? If you have you will notice that you end up paying an interest payment month after month . Bonds work is a similar way.
When a company needs money they can simply issue a bond . Average investors all can buy a piece of that bond. Each month the company pays out an interest payment to their bond holders, and when the bond finally comes due, the company must pay the bond holders the price of the bond.
So, which one is the better investment? It all depends on the individual. Bonds are considered to be safer in order for you to make money. You can make a profit weather the company’s earnings increase or decrease.
If the company does go bankrupt then bond holders stand a better chance of getting their money back then shareholders. So there are a number of situations where it is better to be a bond holder then a stock holder.
However, historically stocks have done better then bonds in the long run . This is why most financial experts consider stocks to be riskier, but with a higher payout. And it is generally believed that the younger you are the more you can afford to keep your money in the stock market.
A good rule of thumb to keep your account well diversified is to keep a percentage in bonds equal to your age in bonds. So if you are 40 keep 40% in bonds and 60% in stocks .
That is just a rule of thumb however ; each individual is different and has different goals. Depending on how much risk you want to take you could end up with a portfolio that is all stocks or all bonds.
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