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Is it Better to Invest in Stocks or Bonds?

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By: Charlotte Couch
Jan 19, 2021 • 6 min read

Is it Better to Invest in Stocks or Bonds?

Stocks. Bonds. Dividends. Interest. If these terms sound alien to you, you aren’t alone. When it comes to navigating the stock market, a decent number of young people aren’t sure where to start. You might have a vague idea of what each of these terms is but have absolutely no idea where to start when it comes to investing. But if you’re reading this article now, you are on the right path to opening a successful financial portfolio.

Investing in a great method for passively growing your wealth. Read on to learn more about stocks and bonds and where you should start when it comes to opening a portfolio!

Before investing in anything, make sure you brief yourself on the basics of stocks and bonds.

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Why People Purchase Stocks

So, what are stocks? Stocks are basically small investments in a company. When you invest in that company, you own a part of it. As a result, you also earn a share of its profits. It can cost anywhere from $1 to $300,000 to buy a stock. Berkshire Hathaway is one of the most expensive stocks to purchase, with a price of around $300,000 a share. As I type this out, Tesla stocks cost $880.02. That said, their price could dramatically change by the time this article is published! That’s the thing about the stock market; it is constantly changing due to varying supply and demand levels.

For instance, AMC Entertainment, Cinemark, and Marcus stocks all took hard hits when the pandemic started, and regular theatergoers had to stay home. It didn’t help that streaming services were already growing in popularity, offering viewers the chance to watch content in the comfort of their own homes. In a way, it was the perfect storm. AMC Entertainment even pointed to AT&T’s decision to release its 2021 movie slate from Warner Bros. on HBO Max as part of the reason for its recent drop in stock prices.

You might be wondering why companies sell part of their shares through stock. In short, selling stocks helps the company fund new initiatives. They may use the money to create a new product, pay off debt, or expand their operations. Owners could also borrow funds instead, but they will have to eventually repay the loan, which can drain future earnings.

stocks or bonds

Why People Purchase Bonds

Now that we have a basic understanding of stocks let’s go over bonds. Bonds are loans you give out to the government or a corporation. You can even purchase a treasury bond from the U.S. government. The entity that borrows your money agrees to pay you back on a fixed date. Periodically, they will also send you interest payments. Most companies send them twice a year. That’s how you earn money on them.

U.S. savings bonds are great for people starting to invest, as they are not subject to any local or state taxes, and they also offer fixed interest rates. They also come in three different varieties: Series E, Series EE, and Series I. All three will stop accumulating interest at a certain point. After a quick calculation using the Treasury Direct Savings Bond Calculator, I found that a $50 bond issued in 1980 that was purchased for $25 would earn about $140 in interest, ending in a total value of $165. Not bad, right?

When you issue a bond, you do not earn any ownership rights over the company. So while you won’t directly benefit from the company’s growth, you also won’t have to worry about losing money during its downswings as long as it doesn’t go bankrupt and can stay current on its loans.

stocks or bonds

Stocks vs. Bonds: Which One is Better?

The answer to this question boils down to your personal preferences and current budget.

Most people aim to invest in a mixture of stocks and bonds. That said, if you don’t have the financial resources for investing in both, you can start with one before eventually investing in the other as well. If you’re generally risk-averse and prefer to enjoy a predictable, fixed income, then you should start with bonds. Bonds are also better for people who are interested in starting in a long-term savings plan. If you’re willing to take a little risk for a chance to see some high returns in a relatively short time span, then you should purchase some stocks.

Investing in either does take a little research. There are several different stocks and bonds you can purchase. Each offers its own pros and cons. Picking the right ones and investing in them strategically will be crucial for your success.

stocks or bonds

General Tips for Investing

So, how does one begin investing in stocks and bonds? I’m glad you asked. Most experts recommend the following tips:

  •     First, you need to determine your goals. Do you want to start saving for retirement? Or are your financial goals more focused on short-term success?
  •     Next, you should think about how you want to invest in these stocks. Are you interested in taking a hands-on approach, or do you prefer to have someone helping you along the way?
  •     If you want to control your purchasing decisions, you should open a brokerage account through an online service like E*TRADE or Robinhood. If you want to take a back seat approach to your investing, you should open an account through a Vanguard or Betterment robot advisor.
  •     Once you make your investments, remember to check on them every once in a while.
  •     If you notice your stocks drop, don’t panic and sell them. Remember that the markets rise and fall all the time and usually ride out the fluctuations.

Investing is a great way to help you achieve your financial goals. Having extra cash on hand is crucial for helping you through emergencies or purchasing that car you’ve always wanted. But you won’t see financial success overnight. You might even lose a little money in the beginning. So you will have to be patient.

But once you start seeing positive returns in your account, you’ll be happy you started on this nerve-wracking but exciting financial journey. Do you currently invest money in stocks and bonds? If not, do you plan on doing so sometime shortly? Let us know in the comment section below! 

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