Investing in stocks and bonds is an effective way to put your money to work harder for you, but before deciding how much of your funds to devote, it’s essential that you understand their respective advantages and disadvantages – such as returns, risks, tax implications and how profits may be taxed.
Owning shares of stock gives you partial ownership stake in a company, and the more shares you own, the larger your portion of its profits will be. Stocks tend to be riskier investments than bonds but can yield higher long-term returns as prices fluctuate more freely; on the flipside, if a company performs well its stock price can increase substantially as more people invest.
Bonds Bond investments differ from stock investments in that bond purchases don’t grant any voting rights or ownership stake in the company, instead lending money directly to government or a private company for a set rate of return. Bonds tend to be considered safer investments; however, their values don’t rise quite as rapidly or reach as far.
One of the primary advantages of investing in bonds is their steady source of income, or coupon interest payments, which help diversify your portfolio and guard against inflation over time. However, as interest rates increase your demand may decrease and its price accordingly.
There are various kinds of bonds, such as corporate and municipal, but Treasury bonds are considered the safest investment choice due to being issued by the US government, who has never defaulted on its debt obligations.
Bonds provide more than just interest payments; they can also help fund companies or projects. But keep in mind that holding onto them until maturity won’t bring the same returns as holding stocks would.
As you approach financial goals like retirement or saving for college education, investing more in bonds than stocks may help protect against market fluctuations as you near withdrawal dates. A risk tolerance calculator may be useful for finding an optimal mix between stocks and bonds for you personally; or you could seek professional advice to make the best decision possible for your unique situation.