Stocks & Bonds – What’s the Difference?

Have you heard about the stock and bond markets but don’t quite understand them? If so, that’s understandable—the financial markets and products offered are quite varied and complicated. But here’s a primer on these two, common ways that even a less-than-wealthy person can invest.

When you own a stock:

You own a small percentage of a company. If the company does well, your stock becomes more valuable. If at any time the company’s value declines compared to the day you bought its stock, you’ll lose part or even all of your initial investment. So be sure you buy stock in a company you believe can only become more profitable. In these cases, an investor can triple, quadruple or earn even more on her original investment—and sometimes within a short time period.

RISK: High. Your stock could increase significantly in value, but you could also lose it all in a heartbeat.

When you own a bond:

You’re basically loaning money to someone: usually either the federal government (government bond), a city (municipal bond) or a company (corporate bond). On an agreed-upon basis (often twice a year) for a number of years (often five or 10), you’ll receive portions of your money back with interest, until the total amount you loaned, plus your interest, is paid back. Bonds are safer than stocks because the only way you won’t get your money back is if the entity you loaned it to goes bankrupt. That has never happened with the federal government and rarely happens with cities. Corporate bonds default slightly more often, but even then, bondholders are first in line to get paid. (Even ahead of stockholders!)

RISK: Low for government and municipal bonds. Medium for corporate bonds.

Because bonds are lower risk, the interest paid on bonds is usually a lower percentage than the money a person could gain by buying a stock—providing that stock increased in value, of course, which is never a guarantee. Bond interest is usually guaranteed.

However, if you can afford the risk, there’s a great deal of money to be made in the stock market by choosing companies whose stock value rose significantly, either in a short time period or over several years.

Dennis Houlihan of Houlihan LLP in Fort Wayne, an investment advisor, suggested that someone who’s new to investing check out these websites to get a better understanding of investment terminology and options:

• Vanguard – www.investor.vanguard.com
• Kiplinger – www.kiplinger.com
• NAPFA – www.napfa.org

If you think you’d be better off by first consulting a financial advisor, Houlihan encouraged asking about his or her experience, credentials and the compensation arrangement: Is it fee-only or commission? “And if you’re squeamish, like you don’t entirely trust him, walk away,” Houlihan said.

On a personal level, he said, the following are important:
A. Is he or she competent?
B. Do I like him/her?
C. Do I trust him/her?

There are ways to get into either the stock or bond market with only a little bit of money. Don’t worry about the amount— everyone has to start somewhere. So do a little homework, and then consider making your money work harder for you!


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