When it comes to appraising stocks and bonds as investment options, there’s a tried-and-tested rule to bear in mind.
More specifically, it’s important to remember that stocks have the potential to deliver a far greater return than bonds, but this type of asset incurs far greater volatility along the way. Bonds, in contrast are relatively risk-averse assets that deliver consistent but far smaller gains, making them the favourite of new or inexperienced investors.
Both of these assets offer tangible benefits, however, and in this respect, you may want to consider both in your portfolio. Here’s why:
Appraising Stocks and Bonds – The Similarities and Differences
In simple terms, stocks refer to partial ownership rights and shares in a company, which in turn translates into a fixed share of earnings. In contrast, bonds are essentially loans that guarantee a fixed return and promise to repay the original fiscal commitment, while they typically relate to private sector firms or governments.
As both stocks and bonds can relate directly to businesses, the boundaries between these two investment vehicles are slightly blurred. In the case of some stocks, you may also be repaid in the form of regular dividends, which is also similar to the way in which bonds deliver returns to investors.
While bonds guarantee fixed returns and enable investors to at least recoup their money, however, there are no such assurances when trading stocks. So, while virtual trading platforms such as ADSS have made it easier than ever for investors to trade stocks as derivatives and increase gains by eschewing the burden of ownership, this marketplace remains far more volatile and there’s a far greater chance that you’ll lose your hard-earned capital.
Why you Should Add Both Stocks and Bonds to your Portfolio
When focusing on the core differences between these two entities, it’s easy to become preoccupied on determining which asset class is better.
While it’s always important to appraise the most suitable investment options, however, there’s a strong case to ensure that you include both stocks and bonds in your trading portfolio. After all, it’s crucial that your portfolio remains as balanced as possible from a risk-reward perspective, so you’ll need to include some assets that optimise your potential returns and others that can deliver minimal but frequent gains.
By also diversifying into government bonds, you can create an even more varied portfolio that covers a host of different sectors. This, in turn, means that the value of your holdings will less impacted by the collapse of decline of specific markets, as you’ll have spread your investment across a broader range of assets.