Tuesday, 10 September 2019

Stocks VS Bonds: The Difference

Stocks VS Bonds: The Difference

I mainly want to talk about the difference between stocks and bonds because those are the two popular ways that people invest money besides real estate or opening own business. I think stocks and bonds are two popular terms that people hear, but maybe don't always completely understand what they mean.

In order to understand the difference between stocks and bonds, you have to rewind a little bit and think about a business or company. In order to operate a company or business, you need money to have a day to day operations, in order to give it a purchasing that you need or hire people to work for your company, whatever it is.

There are 2 ways that a new business or existing business or company could get the money that it needs to be able to operate.


Bond

The first way is to borrow that money, and that means the company or the owner of the company will be going into debt. That means they are borrowing money or taking a loan from a bank or from an investor, or personal people that they know.


  • Bond
  • Makes you a lender
  • You earn interest
  • Payment due to you on date of maturity

They will come up with some terms saying "you are going to lend me this money and then I am going to pay it back to you later, and the idea there is that whoever is lending the money is hoping and expecting to make some profit later when they get their money back".


  • Stock
  • Makes you an owner
  • You claim part of a company's asset's earnings
  • No guarantee to get your money back

Another way that a business can raise money is by selling part of the company and which is called "equity". That is what we think about when we hear the word stock.

Stock is literally giving somebody a piece of your company, so the business owner would basically be saying "I am not going to be a 100% owner anymore. I am going to give a little piece of my company away to different people so that they can own some of it too". I am going to sell these pieces, so if you want to be part owner of my business or my company, then you would pay for a little piece of it. 


The Risk In Bond And Stock

The big difference here is that if you are the kind of person who wants to be a lender if you want to lend somebody and you know that they are going to pay you back later and make a profit. There is not a lot of risk in that because there is a contract and the person is going to be held responsible for the terms in the contract because you both signed that agreement.

Being a lender is not as risky as being a part owner or being the owner of a company or a business. The thinking here is, this business could do really well, or it could do poorly.

I mean, who knows, you can't tell the future, maybe right now the business is doing really well, but in another month or year or 3, 4 or 5 years, all of a sudden people just stop consuming, people just stop buying. Maybe people stop using your service or stop buying your products, those are all possibilities because you don't know what's going to happen, you are taking on a lot of risks when you choose to be part owner of a company.

If you buy stocks in a company, you are taking on a lot of risks. If the company does well, yes, you will do well, but again if the company doesn't do well, then you might lose the money that you use to buy your stock. But you are expecting that the business will do well and that you will do well. That is the hope.

But again there is a lot of risk on the stock side because again nobody knows, you can't predict the future of the company perfectly.

I would say decide for yourself,

Bond

If you want to lend a company or business money and know that on the date that you signed, basically it's called the date maturity. You would get back what you lend them and some profit, or think of it as interest.

Stock

If you want to own the business and take on all the risk but that also comes with the chance that if the business does well, you will do really well, there is more risk and also there is a lot of money in that.

If you want to be an owner then obviously you would invest in stocks and if you want to be a lender then obviously you would invest in bonds.

I would say that it depends on where you are in life or what type of person you are or how much risk you can take or willing to take on. Those are all things that you should think about when deciding if you want to invest in a bond or if you want to invest in a stock.

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