Bonds vs. Stock Performance
Original post by Jacquelyn Jeanty of Demand Media
The wide range of investment choices available provides multiple options for different types of investors. For some investors, a consistent rate of return takes priority while others look for larger returns on their investment. When comparing bond versus stock performance, the level of risk and rates of return play a pivotal role in their earnings capacity.
Bond offerings provide government and corporations with needed revenue without handing over controlling interest to bondholders. As a result, bondholders do not receive any profits made by a company nor do they share in company losses. These factors affect a bond's performance in the market in terms their rates of return and the level of risk involved. Any return rates generated by a bond investment equal a percentage of the bond's original price. This means, a bond's rate of return remains relatively consistent so there's little risk of losing the initial investment amount unless the company goes under.
When a company offers shares of its stock for sale, it's offering potential investors a certain percentage of ownership in the company. As partial owners, investors share in the profits and losses made by the company. As a result, a stock's performance can fluctuate more so than a bond investment, especially when companies experience large profits or losses. These aspects reflect the increased level of risk involved when purchasing stock versus bond investments. Ultimately, the level of risk involved with a stock depends on a company's financial history and standing in the marketplace. Investors can choose between blue-chip stocks offered through established companies or small-cap stocks offered through less-established companies. In effect, a larger earnings capacity may exist with less-established companies since these stocks carry a higher level of risk.
The market performance of bonds provides an ongoing return on investment, though certain factors can influence payment amounts along the way. Interest rates and inflation affect bond values in much the same way as they affect other areas of the market. How a bond investment responds to changes in interest rates and inflation depends on how those changes affect the performance of the bond's issuing company (or government) in the marketplace. With stock investments, there's virtually no limit on how high or low they can go in terms of market value. As with bonds, market interest rates and inflation effects affect how a stock performs.
Because of the way they're structured, bonds function as another debt obligation for their issuing company. As a result, a company's credit rating affects how it can price its bond offerings. Investors can check a particular company's rating to determine whether it will make good on its bond offerings. Unlike stocks, bonds remain active for a set period of time, such as 10, 20 or 30 years. Once bonds reach their maturity date, bondholders receive their principal investment back along with any accrued interest gains. Ultimately, a mixture of stock and bond investments can provide a source of stable, recurring income and the potential for growth depending on how particular stock investments fair in the market.
About the Author
Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.