Introduction:

One of the most important questions investors can ask

themselves is whether to invest in bonds or in stocks. Thats why its
important to understand the difference between bond and stocks in
order for investors to be safe.
Stocks represent an ownership interest in a corporation or equity.
The corporation can only issue it. However Bonds are a form of longterm debt and it can be issued either by the corporation or the
government.

Bonds vs. Stocks: Bondholders VS Stockholders

The stockholders have an equity stake, as they own a part of the
issuing company. In fact when you buy a stock, you will have many
privileges like the right to vote on issues related to the future of the
company. You have also the right to share profits in form of dividends
[1].
However, Bondholders represent lenders to the issuer or the
company. Bonds have many advantages over stocks. In fact, as a
lender, you will own a debt. Thus, you ensure the low volatility, the high
liquidity and legal protection. This measure of legal protection is
applied in case of a company bankrupt, as bondholders will often
receive

recovery

amount.

[1]

Bonds vs. Stocks: Return potential

Theoretically, stocks provide greater return potential then bonds.
In fact, if you invest in a successful business, the return on stocks can
increase exponentially. Indeed, if the earnings continue to rise, the

price of the stock will normally rise as well. Thus, having greater return
on the stocks.
However, bonds provide a fixed return. In fact, bonds take in
consideration the annual inflation and the time value of money. Thats
why they are less volatile then stocks. Indeed, bonds are a powerful
tool to hedge market fluctuations

Bonds vs. Stocks: Risk

In order to invest, its important to understand the relationship between
risk and potential return. As the risk represent the probability to lose
money that you invest, its important to find the balance between risk
and potential return. In business there is a general rule, the higher risky
investment have the higher return. Conversely, if you take lower risk,
you will earn less return. [2]
Indeed, Bonds in general are considered less risky than stocks for
several reasons:

Bonds protect the holder, as the issuer is obliged to return the

face value or security value at maturity. Stocks have no such
obligation from the issuer.

Bonds issuer pays investors a fixed interest income. However,

stocks issuer doesnt have an obligation to pay the dividends to
shareholders.

The bond market is less vulnerable to price then stock market.

Conclusion:
As Bonds have a known and certain income flow, they are
considered as lee volatile. Over time, stocks should generate higher
revenue than bonds. However, this higher revenue will imply higher risk.
Thus, the investment in bonds or stocks depends on the time before
retirement. For a long-term strategy, stocks present more advantages,

as there is more time to correct any downturn that may occurs.

However, for a short-term strategy bonds present more advantages. In
fact bonds are able to face the market fluctuations.

References
[1]

Eberhart, A. C., & Siddique, A. (2002). The LongTerm Performance

of Corporate Bonds (and Stocks) Following Seasoned Equity
Offerings. Review of Financial Studies, 15(5), 1385-1406.
[2] Fama, E. F., & French, K. R. (1993). Common risk factors in the returns
on stocks and bonds. Journal of financial economics, 33(1), 3-56.