Investment Tips: Comparing Bonds Vs Stocks as an Investment

A big difference between bonds and stocks as investments are that bonds are considered 'bear' investments and stocks are considered 'bullish'. In other words, when the stock market is being flailed and vulnerable to 10-20% swings, more cautious investors may head for the bond market in which returns may be more stable and/or fluctuate less. Some investment advisers believe it is sensible to diversify investments between the two markets via portfolio ratios such as 30:70, or 40:60. In turn, this can be an indicator of a particular firms stance on the market.

Bonds and Stocks really are two different breeds of investment. Bonds, especially the Government kind, are less vulnerable to recessions and weak market conditions because their value is tied to their interest rates. The value of stocks however, is generally not coupled to interest rates per se, but rather share price via economic and market conditions. While a change in the Federal reserve funds rate may influence stock prices, these changes in valuation are correlation only and not an absolute relationship as with bonds.

Risks and Rewards:

There are risks and rewards associated with both bonds and stocks because of principles such as opportunity cost and market timing. Time value of money is also a factor in the pricing of investments because present values of an investment are determined in part by the future flow of income and/or capital gains via stock dividends, bond interest payments, as well as changing industry and/or market conditions. As these things change, the foreseeable value of investments can rise or decline because of better investments such as higher yielding bonds, a giant new contract for a newly financially streamlined company, or an IPO in a high demand industry. Risks and rewards associated with stocks and bonds are listed below:

*Financial Stability: In the case of bonds, an investor can generally have more peace of mind because even if interest rates do rise causing the price of bonds to lower, the percentage fluctuation in price is likely to not be as great as can occur in the valuation of stocks.