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Bonds and Stocks
Business and Finance
What are Bonds?
Bonds are debt instruments that are given out to companies as loans. When a company
wants to raise money, it sells a bond for the cash. Additionally, the company promises to pay
back the borrowed sum with agreed interest. It is that which is regarded as the compensation rate
that the investor who acts as the lender in this case, ought to receive. A fixed amount of return is
a key feature of bonds. The bond insurer promises to pay up the borrowed cash plus the interest
at an agreed date in the future.
On the other hand, lots of media attention is given to the stock market. However, the
global bond market capitalization trounces the equity market by far. The Securities Industry and
Financial Markets Association (SIFMA) estimated in 2018, that stock markets were valued at
$74.7 trillion, globally, whereas bond markets were worth $102.8 trillion (Napoletano, 2020).
Bonds are therefore investment securities that give the lender regular interest payments as
agreed in the contract. When the stipulated period elapses, then the bond issuer gives back the
investors’ cash. This timeframe is known as maturity period. Companies sell bonds for various
reasons like acquisitions and new project expansions. Governments’ also sell bonds for budget
funding purposes. Investment-grade bonds, which are highly viewed as lower-risk investments
than equities, are seen as necessary in hedging the risk of more volatile investments like stocks.
They also have the advantage of providing a steady stream of income, all the while preserving
ones capital (Napoletano, 2020).
What are Stocks?
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These equity instruments give their bearer ownership of the company. Bonds are issued
from a variety of actors like governments, corporations, nonprofit organizations etc., while sole
proprietors, partnerships, and corporations mainly issue stocks. Therefore, the manner of
execution is that when a company wants to raise money, it sells stocks or shares. In return, the
company receives the much-needed capital, and it offers the investor a portion of the company
ownership.
Such an arrangement obviously depends on the amount of shares bought vis a vis existing
share structure. Moreover, excess earnings and voting rights feature onwards. The investor
reaches to a point where they have power to influence company management operations (Bonds
vs Stocks - Overview, Characteristics, Example, n.d.).
The major difference is that stocks do not offer guaranteed rate of returns. In fact,
the earnings fluctuate highly. However, for bonds, which is a fixed term instrument, guarantees
the investor a fixed amount in returns over the course of the contract. The New York Stock
Exchange (NYSE), NASDAQ Stock Market, or the American Stock Exchange (AMEX),
Toronto Stock Exchange (TSX), Euronext and the London Stock Exchange are just some of the
financial exchanges where one can buy stocks.
Tightly regulated by the respective securities exchange commissions in individual
countries, they are offered through an Initial Public Offering (IPO), and be continuously traded
in the secondary market amongst the investors (Bonds vs Stocks - Overview, Characteristics,
Example, n.d.). Bonds rather are not sold in stock exchanges, but on over-the-counter (OTC).
This means individual brokers form buyers and sellers do the work, and no centralized platform
is required. Because of that nature, bonds are more illiquid and difficult to transact than shares.
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If an investor has a high-risk appetite, stocks work for them. Though more volatile, they
have more potential returns than bonds. Should companies fail, stocks could lead to massive
losses and even incurring debts on the investors’ part. In the event of liquidation, stocks are
subordinated to respective debt holders. For investors who want a return, and less exposure to
risk, then bond works for them. They are less volatile than stocks, but also offer far lesser in
returns than stocks (Bonds vs Stocks - Overview, Characteristics, Example, n.d.).
Advantages of each
Stocks therefore hold the advantage that issued money received by the company does not
have to be repaid. On the other hand, bonds also have their attractive sides. Issuing bonds does
not affect company management structure. Frankly, as long as investors are available, companies
can continue to issue bonds without worrying of interference in operations from their investors
(Smith, 2020).
Stocks on the other hand allow for an increase in existing shares once shares have been
issued. So future earnings are shared amongst a larger pool of owners, than at the first time prior
to the issuing of new shares. We therefore could find a decrease in earnings per share (EPS) for
every investor at the end of the financial year (Smith, 2020). Therefore, the earnings per share
are viewed by many as the important matrix in evaluating the financial health of a company.
Constant decrease in the EPS paints a bad picture for any new investor (Smith, 2020).
When a company goes successfully beyond the startup phase, it turns to the capital
markets for additional funding. This may be due to the prevalent reason of having lower streams
of income that are insufficient for expansion. One way to attain this goal would be to split the
company into shares and launch an initial public offering (IPO). So when a share is bought, it
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makes the buyer an owner, hence its referred to as “equity.”
(https://www.facebook.com/thebalancecom, 2013)
For bonds, on the other hand they represent debt. Its money raised by companies that
issued bonds that makes those firms obligate to pay the cash back with interest after a specified
period. A coupon paid to the investors can be once, twice, thrice, quarterly or many other times a
year. When mature, the full amount of the original principal is returned to the investor. If the
issuer fails to pay, then the bond defaults, though such cases are rare
(https://www.facebook.com/thebalancecom, 2013).
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References
Bonds vs Stocks - Overview, Characteristics, Example. (n.d.). Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bonds-vs-
stocks/
Facebook.com/thebalancecom. (2013). Difference Between Stocks and Bonds? The Balance.
https://www.thebalance.com/the-difference-between-stocks-and-bonds-417069
Napoletano, E. (2020, May 15). What Is A Bond? Forbes Advisor.
https://www.forbes.com/advisor/investing/what-is-a-bond/
Smith, L. (2020, October 1). Why Companies Issue Bonds. Investopedia.
https://www.investopedia.com/articles/investing/062813/why-companies-issue-bonds.asp

Unformatted Attachment Preview

Bonds and Stocks Business and Finance What are Bonds? Bonds are debt instruments that are given out to companies as loans. When a company wants to raise money, it sells a bond for the cash. Additionally, the company promises to pay back the borrowed sum with agreed interest. It is that which is regarded as the compensation rate that the investor who acts as the lender in this case, ought to receive. A fixed amount of return is a key feature of bonds. The bond insurer promises to pay up the borrowed cash plus the interest at an agreed date in the future. On the other hand, lots of media attention is given to the stock market. However, the global bond market capitalization trounces the equity market by far. The Securities Industry and Financial Markets Association (SIFMA) estimated in 2018, that stock markets were valued at $74.7 trillion, globally, whereas bond markets were worth $102.8 trillion (Napoletano, 2020). Bonds are therefore investment securities that give the lender regular interest payments as agreed in the contract. When the stipulated period elapses, then the bond issuer gives back the investors’ cash. This timeframe is known as maturity period. Companies sell bonds for various reasons like acquisitions and new project expansions. Governments’ also sell bonds for budget funding purposes. Investment-grade bonds, which are highly viewed as lower-risk investments than equities, are seen as necessary in hedging the risk of more volatile investments like stocks. They also have the advantage of providing a steady stream of income, all the while preserving ones capital (Napoletano, 2020). What are Stocks? These equity instruments give their bearer ownership of the company. Bonds are issued from a variety of actors like governments, corporations, nonprofit organizations etc., while sole proprietors, partnerships, and corporations mainly issue stocks. Therefore, the manner of execution is that when a company wants to raise money, it sells stocks or shares. In return, the company receives the much-needed capital, and it offers the investor a portion of the company ownership. Such an arrangement obviously depends on the amount of shares bought vis a vis existing share structure. Moreover, excess earnings and voting rights feature onwards. The investor reaches to a point where they have power to influence company management operations (Bonds vs Stocks - Overview, Characteristics, Example, n.d.). The major difference is that stocks do not offer guaranteed rate of returns. In fact, the earnings fluctuate highly. However, for bonds, which is a fixed term instrument, guarantees the investor a fixed amount in returns over the course of the contract. The New York Stock Exchange (NYSE), NASDAQ Stock Market, or the American Stock Exchange (AMEX), Toronto Stock Exchange (TSX), Euronext and the London Stock Exchange are just some of the financial exchanges where one can buy stocks. Tightly regulated by the respective securities exchange commissions in individual countries, they are offered through an Initial Public Offering (IPO), and be continuously traded in the secondary market amongst the investors (Bonds vs Stocks - Overview, Characteristics, Example, n.d.). Bonds rather are not sold in stock exchanges, but on over-the-counter (OTC). This means individual brokers form buyers and sellers do the work, and no centralized platform is required. Because of that nature, bonds are more illiquid and difficult to transact than shares. If an investor has a high-risk appetite, stocks work for them. Though more volatile, they have more potential returns than bonds. Should companies fail, stocks could lead to massive losses and even incurring debts on the investors’ part. In the event of liquidation, stocks are subordinated to respective debt holders. For investors who want a return, and less exposure to risk, then bond works for them. They are less volatile than stocks, but also offer far lesser in returns than stocks (Bonds vs Stocks - Overview, Characteristics, Example, n.d.). Advantages of each Stocks therefore hold the advantage that issued money received by the company does not have to be repaid. On the other hand, bonds also have their attractive sides. Issuing bonds does not affect company management structure. Frankly, as long as investors are available, companies can continue to issue bonds without worrying of interference in operations from their investors (Smith, 2020). Stocks on the other hand allow for an increase in existing shares once shares have been issued. So future earnings are shared amongst a larger pool of owners, than at the first time prior to the issuing of new shares. We therefore could find a decrease in earnings per share (EPS) for every investor at the end of the financial year (Smith, 2020). Therefore, the earnings per share are viewed by many as the important matrix in evaluating the financial health of a company. Constant decrease in the EPS paints a bad picture for any new investor (Smith, 2020). When a company goes successfully beyond the startup phase, it turns to the capital markets for additional funding. This may be due to the prevalent reason of having lower streams of income that are insufficient for expansion. One way to attain this goal would be to split the company into shares and launch an initial public offering (IPO). So when a share is bought, it makes the buyer an owner, hence its referred to as “equity.” (https://www.facebook.com/thebalancecom, 2013) For bonds, on the other hand they represent debt. Its money raised by companies that issued bonds that makes those firms obligate to pay the cash back with interest after a specified period. A coupon paid to the investors can be once, twice, thrice, quarterly or many other times a year. When mature, the full amount of the original principal is returned to the investor. If the issuer fails to pay, then the bond defaults, though such cases are rare (https://www.facebook.com/thebalancecom, 2013). References Bonds vs Stocks - Overview, Characteristics, Example. (n.d.). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bonds-vsstocks/ Facebook.com/thebalancecom. (2013). Difference Between Stocks and Bonds? The Balance. https://www.thebalance.com/the-difference-between-stocks-and-bonds-417069 Napoletano, E. (2020, May 15). What Is A Bond? Forbes Advisor. https://www.forbes.com/advisor/investing/what-is-a-bond/ Smith, L. (2020, October 1). Why Companies Issue Bonds. Investopedia. https://www.investopedia.com/articles/investing/062813/why-companies-issue-bonds.asp Name: Description: ...
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