- Bonds pay a specified interest rate over a period of time, and will return the initial investment at the maturity date. Because of the fixed-interest payment, bonds will have less price volatility over time. Stocks offer ownership of a company. This ownership can provide the investor with dividend payments, voting rights and a percentage of ownership of the profits.
- Stocks have two primary risks: alpha and beta. Alpha risk refers to the company's ability to increase profitability. Beta risk deals with market risk. Most stocks have some correlation to the gains and losses of the overall stock market. If a stock has a beta of 1.5, it will increase or decrease 150 percent as much as the stock market.
Bonds have the following risks: interest rate risk, reinvestment risk, inflation risk, market risk, selection risk, timing risk, duration risk, liquidity risk, credit risk, default risk, event risk and prepayment risk. Most of these fall into two general categories: economic risk and company risk. - Diversification can reduce the amount of volatility and risk in an investment portfolio. However, building a sufficiently diversified portfolio of individual stocks and bonds may take more money than some new investors can afford. In this case, mutual funds, which hold the stocks of multiple companies, may be a better option. They allow an investor to own a diversified portfolio using much less money.
- The benefits of stocks comes in the form of dividends and capital gains, while bonds pay interest. Reinvesting your returns will keep your money working for you as you pursue your financial goals.
- Investing in stocks can lead to loss of the principle amount you invested. However, prudent investing can help decrease the risk of significant losses.
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