Stocks and bonds each possess their own sets of advantages and disadvantages. Furthermore, each asset class features dramatically different structures, payouts, returns, and risks.
Understanding the distinguishing factors that separate these two asset classes is key to building a healthy investment portfolio that thrives over the long haul.
Of course, asset allocation mixes are unique to each individual, based on an investor's age, risk tolerance, and long-term investment and retirement goals.
Stocks are essentially ownership stakes in publicly-traded corporations that give investors an opportunity to participate in a company's growth.
But these investments also carry the potential of declining in value, where they may even drop to zero.
In either scenario, the profitability of the investment depends almost entirely on fluctuations in stock prices, which are fundamentally tied to the growth and profitability of the company.
A bond is a fixed income instrument that represents a loan made by investors (known as "creditors" or "debtholders") to borrowers, which are typically corporations or governmental entities.
Also known as coupons, bonds are characterized by the fact that the ultimate payouts are guaranteed by the borrower.
These investments, there is a concrete maturity date, upon which the principal is repaid to investors, along with interest payments attached to the interest rate that existed at the onset of the loan.
Bonds are used by corporations, states, municipalities, and sovereign governments to finance a multitude of projects and operations.
That said, some bonds do carry the risk of default, where it is indeed possible for an investor to lose his or her money.
Such bonds are rated below investment grade, and are referred to as high-yield bonds, non-investment-grade bonds, speculative-grade bonds, or junk bonds.
Nevertheless, they attract a subset of fixed income investors that enjoy the prospect of higher yields.
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