Bonds typically earn lower returns than stocks, and they aren’t nearly as engaging to watch as the stock market can be. On the other hand, they offer investors a lot more stability than often-volatile stocks can do. Bonds are a great investment option if you want something that will accrue more interest than depositing the money in a bank account but don’t want to risk your kid’s college fund or your own retirement fund on the stock market. Stocks can be exciting to watch and have a lot of potential but you do need something stable to invest in as well, and bonds offer a lot more peace of mind than stocks generally do.
The main difference between stocks and bonds is that stocks are a form of equity ownership, whereas bonds are based on debt. In general, investing in debt is a more secure option than investing in equity. As debt holders have priority over shareholders, in the worst of circumstances (like in cases of bankruptcy), debt holders will at least get some of their money back.
A Safe Investment Option
The stock market can be a great place to speculate and there are always chances of a big returns on your investment, but it’s not without risk. If you buy shares in a given company and it ends up going bankrupt, you stand a good chance of losing your investment. On the other hand, because bonds are based on debt, you’ll still get at least some of your investment back in even the worst-case scenario. Bonds from the U.S. Treasury and other sources with extremely good credit will give you the least returns on top of your investment, but they are also the safest option out there. However, just because bonds are a safe option in general, you should keep in mind that not all bonds are safe – junk bonds are the very risky ones.
In general, stocks outperform bonds over the long run in terms of appreciating value. That being said, in times of recession bonds do sometimes outperform stocks. Bonds won’t give you the same yields as stocks potentially will, but they’re far more consistent at giving you a constant yield than stocks are – it’s a much wiser option to park your retirement fund in bonds and live off of the yields than it is to try and do the same with stocks.
More Return on Investment than in a Bank
If you want to find a safe place to keep your money, a savings account will provide you with just that – but when you consider the interest rates that banks offer on your investment, there’s really nothing much to speak of. Bonds will give you some return on investment, yet are a much safer place to park some of your funds that you don’t want to risk – a good example being money set aside for college. Bonds are a great place to put funds that you don’t need in the short term because they will appreciate in value, even if it is at a lesser rate than stocks.