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Bonds have less risk, but stocks potentially provide greater returns.

Looking at this, I should add to it. There are two ways a bond is less risky than a stock.

First is the nature of a bond. It's a loan, and there are two kinds, coupon and zero-coupon. When a company sells a "coupon" bond, they guarantee that on specific dates they will pay interest, and on a specific date in the future they will return the principal. The bond has a number of coupons attached to it, and each is dated. When the date on the coupon arrives, you turn it in and receive your interest payment. The main part of the bond is called the corpus, and it's also dated. (Having said that, there is a market for "stripped" bonds; someone will buy a bond, remove the coupons, and sell the coupons and the corpus separately to people who don't want to invest long-term.) A zero-coupon bond is sold at a discount from its face value, and you hold it till it matures then receive the face value at that time. The bottom line with bonds is, they are obligated to pay you exactly what they say they're going to pay you exactly when they say they will. The downside is, they won't pay you more than that and stocks potentially will pay you far more than that. Ask the investors who bought Apple in 1984 when it was $25 about that. (Also talk to the investors who bought it at $700...right now, it's around $550.)

The other is if the company goes under. Should a corporation have to be liquidated, they are required to make all the bondholders whole before the stockholders receive anything.

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โˆ™ 2008-12-25 22:29:18
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Q: What is the difference in stocks and bonds investing from a personal vs a corporate point of view?
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