If you want to learn how to invest then you’ve come to the right place. Are you just beginning to develop your asset allocation and build your investment portfolio? Then you may be wondering where to put your money. Well, there are many choices that can be pretty bewildering. So as a starting point, I’d like to offer you some practical investment advice and to share some basic concepts on choosing the right investments: we can start by understanding the differences between stocks and bonds.
Image from Bull Market Data
Choosing the right stocks and bonds can be a challenging task. With the current market doing rather badly, it’s become imperative for investors to review those investments that are worth their money and time to evaluate.
Also, note that there is investment risk in owning stocks and bonds. So as part of creating your portfolio, you’ll have to do a risk analysis profile and determine which investments you’re comfortable with owning. Here are some basic definitions of a few asset classes that you may want to consider looking into, as they certainly have a place in any investment portfolio!
Investing in Stocks and Bonds: Some Investment Basics
Buying A Stock vs Buying A Bond
Buying a stock is purchasing a percentage and becoming part owner of a particular corporation.
Buying a bond is loaning money to a particular company (or the government) and expecting a fixed return after a set period of time. If you purchase a bond, you won’t be issued a percentage of a company’s profits; instead, once a bond matures, you can withdraw your invested money plus a fixed interest. Bonds are typically issued by a company or the government.
Blue Chip Companies vs Small Capitals
Should you buy large cap or small cap stocks? Every equity portfolio should have some representation in both asset classes.
Blue chip companies are businesses that are already established in their respective fields and have shown good track records for earnings and healthy dividends. As an investor, it’ll be less risky for you to make money with known blue chip companies than with smaller cap stocks, but the commensurate rewards are not usually as substantial as those that one may potentially receive by betting on higher risk, aggressive small caps. Also, due to the potentially thinner market for small caps (or penny stocks), it’s usually much easier and safer to unload blue chips when the time comes to consider an exit strategy.
Start up or small capital businesses are represented by small cap stocks. The underdogs or the new kids on the block, these small businesses should be watched pretty closely for they can produce tremendous results in a few months. However, as I’ve mentioned earlier, there is more risk with owning them than with taking a position in index funds or larger cap stocks since they are much more volatile (with a higher beta coefficient) and unpredictable. You haven’t seen a stock tank faster than these types of stocks do — they normally decrease in value at a much faster rate than do well established blue chip companies.
Government Bonds vs Corporate Bonds
U.S government bonds are some of the safest investments to own. Since they are backed by “the full faith and credit” of the government, you can expect that no matter what happens, you’ll be getting your money back plus interest.
Corporate bonds are debt securities that are issued by companies. They typically have a better return than other types of bonds. But they also carry some amount of risk, such as when an issuing company goes bankrupt. However, the slight consolation here is that in the event of bankruptcy, a company’s bond holders have priority over stock holders.
The End Game: Stocks vs Bonds
Stocks have no ceiling. Meaning to say, you can earn unlimited amounts of money depending on how well a particular company performs.
Bonds have a ceiling. At the end of a fixed time period, you’ll only receive the amount that you’re owed based on the terms of the bond.
These are the basic concepts behind stocks and bonds. In the end, it’s all about the investor. My biggest recommendations? Always do your due diligence before jumping into an investment in order to minimize any losses in your portfolio. And don’t forget to diversify!