12:09 14 February 2013
Our hard-earned money deserves better treatment and generally, for most individuals, investing is done after much thought and analysis. One common choice that comes to mind is investing in stocks, which is actually not a simple undertaking. Bond investing, on the other hand entails a long period which is not known to a lot of investors.
Let us give you some information on these two popular investment options to help you in your analysis:
• Investing in stocks can make your money grow or appreciate in price through payment of dividends. Bonds, on the other hand, pays an income at higher interest rates, much more than what can be earned from any form if bank placements.
• The first thing you should know about stock investing is its prices can be very volatile. So if the investor is putting his money into a stock market, he can then earn money. However, some investors can potentially lose money.
• In bond investing, prices could also rise and fall and this is where the risk comes in. However, investing in bonds poses lesser risk because price changes of bonds are less harsh. This means that the investor makes more money because of higher interest payments, compared to dividends earned from stock investment.
• However, just like in any investment, there is no guarantee that you will earn from it or even retain it.
• Bond prices can appreciate when investors dispose of their stocks and replace them with bonds. This is generally known as a flight to safety. Investing in both bonds and stocks is an investment strategy used by a lot of investors to compensate for possible losses.
• In the next scenario, prices of commodities continuously increase and so do the interest rates. During this time, if stock prices continue to plunge, the situation may not even be saved by the bond investment as it will also be negatively affected. So in this worst case scenario, both investments may not be recovered.
• All in all, both investment types can earn some form of income or growth for the investor, but he should be well informed of its accompanying risks. In most cases, simultaneously investing in both can reduce the risks, but of course, it is not one hundred per cent guaranteed all the time.
• Seasoned investors are well aware that during hard times when interest rates and inflation are extraordinarily high, these two types of investment can be hit hard. Stocks drop when corporate revenues are down. Bonds fail due to interest rate risk.
• Additionally, when inflation soars, making the value of the bond and its possible income lower, the automatic response of investors is to sell them which further jeopardizes bond price.
• So how does an investor circumvent such extreme losses during extremely bad times? He can invest in two more investment portfolios such as a premium money market security and other minor investment options to counterbalance the losses in his major investments.
• In this case, the old adage of not putting all your eggs in basket works like a miracle.
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