Company Stocks vs Corporate Bonds

While most people are somewhat familiar with stocks, corporate bonds are not as widely understood. Both options allow you to invest in a particular company and allow that company to use your money for business purposes. However, they differ in some key ways. Here are the basics of company stocks and corporate bonds. 

Creditor vs. Owner

When you are dealing with corporate bonds and company stocks, the main difference is what you become when you buy one. When you purchase a share of stock in a company, you become a part owner in the company. When you purchase a corporate bond, you become a creditor. The company is actually borrowing your money and then paying you interest for it. They will eventually pay you back the full amount that they borrowed as well. With both options, you are giving the company money to work with. The difference is in what you expect to get back from the investment and the safety of it. 

Potential of Each Investment

As investors, we each have our own tolerance for risk and desires for a return. Corporate stocks and bonds differ in these areas. When you buy a stock, the main reason that you will do so is because of the potentially high return on your investment. Stock values can move up rapidly if the company does well. As a stock owner, you could double or triple your investment. Sometimes, you get lucky and select a company like Google in its infancy. Then your stock price goes up considerably. 

While stocks present you with a huge potential return, you could also end up with nothing. If the company goes bankrupt, your stock price will go down to $0. This means that your entire investment is gone and you have nothing to show for it. 

With corporate bonds, the situation is a little different. You lend the company money, and it agrees to pay you a certain amount of interest. You will receive regular interest payments over the life of the bond. Then at the end, you can cash in your bond and get your initial investment back. With this setup, your investment potential is capped out. Regardless of how well the company does, you are still going to get only the same amount of interest. If you had bought a corporate bond in Google, for example, while many shareholders got rich, you would have gotten just a regular interest payment. 

As a bond holder, however, you make a much safer initial investment. It is very rare for the value of a bond to go down to $0. Even if the company files bankruptcy, creditors are at the front of the line to get their money back. 

Investment Considerations

When trying to develop a portfolio, you should keep both investments in mind. Stocks have outperformed bonds over the long haul, but bonds are safer. To form a balanced portfolio, you should have several stocks and buy a few bonds as a safe investment.asd

blog comments powered by Disqus
Scottrade