The main difference between equities (often known as shares or stocks) and bonds is that when you buy an equity, you are buying a small share in a company. A bond, on the other hand, is a loan from you to a company or the government.
Equities
When you buy equities, you are essentially buying small chunks of a company. As a shareholder, the more shares you buy, the more of the company you own. If that company does well, the value of your shares will go up and, if you wish, you can sell your shares for more than you paid for them. Unfortunately, the opposite is also true. If the company does badly, the price of your shares will plummet, and you will lose money if you sell them. If the company goes bankrupt, you may lose your shares.
Bonds
A bond is when you loan the government or a company money. You are not buying a share - instead, you are loaning an organisation money and they are in your debt for a set period. As a creditor, you will be paid interest on that loan for a set period of time, and then the amount you paid for the bond will be paid back. If a company you have a bond with goes bankrupt, you’ll stop getting interest payments and may not get your money back. How long you have a bond can range from a few days to 30 years, and the interest you get will depend on the time and length of the bond.
Equity or debt?
Equity and debt markets usually mean stock markets and bond markets. Companies will often sell shares to expand, and investors can benefit from the future success of the company. If you buy a lot of shares, you may also have some decision-making power in the company. Buying a bond won’t give you any power over the company, but you’ll agree to the interest they pay you in exchange for a loan. If a company goes into administration or liquidation, people with bonds are usually paid before shareholders.
Capital gain and fixed income
Whether a stock or bond is right for you depends on what you’re looking for. You will get money from your bond through interest payments. Depending on the bond you get, you could get monthly, quarterly, every six months, or a lump sum when the initial loan is repaid. When you buy a share, you make money if you sell that share at a higher price than what you paid for it. Stocks are less predictable, but may offer a larger reward, whereas bonds are more stable, but may yield smaller payoffs.
Are equity or bonds right for me?
There is no right or wrong answer here - bonds and stocks are different and have different offerings. When it comes to money, you really don’t want to have all your coins in one basket. Creating a diverse portfolio can set you up for success.
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