The Basics of Investing in Stocks and Bonds, a Guide for Beginners

 

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When it comes to investment, many people consider many things like risk which is one of the determining factors of an investment choice. People prefer to invest in areas and things they believe carry the minimal risk ever and the reason for that are quite simple, high guaranteed returns. The logic here is quite simple, the safer the investment, the higher the returns guarantee and so on.  

This is why many people prefer to invest in stocks and bonds or both at the same time. These two investment channels are so famous that even people who have never invested in them know of them and are even considering an investment in them. The reasoning in many of these people is that these two areas present the least risk on their investment. However, this is always not the case as has been witnessed in the past. There are cases where people have actually lost money in stocks and bond investment. The most painful thing is that no one ever sees things coming and as such, they never anticipate any such risk.  

Thus, when the unfortunate eventually happens many people are caught off guard. There is one thing you need to know at all times regarding the Bonds and stocks market, there is always more to them than what many know or even think off. Talks about Stocks and Bonds are always dominated by the positive side of this investment ignoring the other side of it. Yes, it’s true that bonds and stocks carry a minimal risk depending on where you invest but that is not always the case.  

To stay on the safe side of things, it is important to understand all the basics regarding stocks and bonds and get to understand everything clearly. From here, you can then proceed on to invest in an area you are confident you will get higher returns. That said, here are some details you need to consider about stocks and bonds. 

What Are Bonds ?

To understand the stocks and bonds investment, it is important to start by defining these two and what they mean in the investment world. Some people confuse these two while others think they are same things which is not the case. 

If you are one of the people who are yet to master these differences between these two consider these well brought out descriptions below starting with bonds. 

Bonds simply mean a loan from an individual to a company or the government. In this kind of arrangement, there is normally no equity involved or even any shares bought. 

In simple terms, a company or country will be indebted to you if you buy bonds from them. Upon purchase, the bond will start to accrue some interest which will be paid together with the principal amount at the end of the agreed time. 

As seen above, bonds can bought from companies and governments depending on who is need. The assumption in many people is that bonds are risk free which is why many people prefer them despite them paying interest sometimes. However, that is not entirely the case as some bonds come with a considerable risk.  

For instance, if you buy a bond in a company that is stricken with a myriad of challenges threatening its existence then that there could just be a big risk. The company could go down or bankrupt disappearing with your money altogether. Thus, it is always advisable to do your due diligence first before buying bonds in any company. 

Here is an illustration of how a bond works. Suppose you buy a bond at a cost of $3500 and the bond pays 2% interest per year for a period of 10 years, this interest will guarantee you a return of $70 per year on interest alone which is evenly distributed across the year. At the end of the 10 years you will have total interest earnings of $700 plus your initial capital. This kind of scenario is called waiting until your bond reaches maturity. 

The good thing with bonds is that the investor will always know what they are signing up for given that the interest rates can be used as a basis of calculating the fixed income over a period of time. 

The bond durations depend on many things like when you buy them, the company you buy them from and could last anywhere between weeks to a maximum period of 30 years. The same way, the yield or interest rate on these bonds varies depending on the company you buy them from and when.

What are Stocks? 

Stocks are a bit different from bonds; they represent a partial ownership in a company. This means that if you are buying stocks in a company then you are purchasing a small part of the company. 

The more you buy the more acquire a larger size of the company and so on. Take this case as an illustration, a company has a stock price of $60 per share and you invest $6000 that will be 100 shares of $60 each. 

Now suppose the company does so well for a period of ten years reaching success in the process. Remember at this time, the success of the company will also be your success and the value of your share will grow with your company. If by this time the price of the share rises by 50% to $90 your investment in the company will also rise by 50% to now $9000. Depending on why you chose to buy those shares, you can choose to sale them to another investor at these new rates and make a profit of $3000 in the process.

That seems interesting right, well not so much. That is only the case if the company does so well and grows for the period of time in question. However, in the event the company doesn’t do well then the share price could plummet resulting in losses in the process. This is why you are always advised to invest in companies that are promising with a huge growth potential over a period of time. 

That is it for investing in bonds in stocks. From the illustrations above, you can clearly see that even though stocks and bonds come with a considerable risk, stocks come with a considerable amount of risk. In the same way, you can clearly see that stocks promises more returns over a short period of time compared to stocks.

Conclusion

Investing in stocks and bonds requires some prior knowledge and understanding before proceeding. Key to note about these investments is the companies to invest in, the terms of the shares and bonds among other things. The amount of money needed to start with this investment also varies but in many cases the amount money needed to start investing in shares is relatively lower compared to bonds especially when lending to the government.