There are two main asset classes: stocks and bonds. Sure, international stocks, real estate, and commodities also have a part in most people’s portfolios, but you really only need the two mentioned above to achieve a minimal level of diversification. Therefore, the issue of stocks versus bonds is an important one for investors. It’s also important to understand why you need both. Proper risk management requires that you own at least a portion of both asset classes: stocks and bonds. However, how much of each you own will largely depend on your risk tolerance and time horizon. Young investors will want to own more stocks and older investors more bonds.
So what is the difference?
Bonds, on the contrary, are basically a loan, exactly the same as if you were to borrow money to buy a house or a car. When you buy bonds, you have a legal right to receive a set interest rate in return. This contractual right supersedes the rights of common shareholders; however, bonuses generally do not allow you to participate in company decision-making. Nor do they usually increase in value if the company increases its profits. However, they are much less risky than stocks.
Both stocks and bonds are issued by a company to raise capital. The shares represent a real capital investment in the company; a real ownership interest in that company. When you own shares in a company, you have the right to vote for board members, on important political decisions, and most importantly, the right to a share of any residual profits that may exist after the bills have been paid. . If the company in question manages to increase its profits, the value of the shares will increase steadily over time along with the profits. And if the company sees fit to pay a dividend, stock ownership makes you eligible to receive a portion of the profits.