Pros and Cons of Investing in Stocks vs Bonds
There are plenty of investment products available for investors to invest in. Depending upon their risk appetite, their portfolio, and the knowledge about the various asset classes, they invest. Some investors are risk-averse, so they mainly invest in hard assets such as real estate, gold, and other metals, various government schemes, fixed deposits, or bonds. Lack of awareness about other financial assets leads them to stick with the traditional asset class. But with the rise of the capital market, there are various products which provide great returns with substantial risk such as stocks, ETFs, Mutual funds, and other products. Stocks and bonds are the simplest of all, as it does require much complexity. One of the advantages of investing in stocks is that it provides much better returns in the long term but one key thing to note is that one also has an appetite to take a much bigger risk. Let’s look at the pros and cons of investing in stock instead of bonds:
- Risk Factor:
Risk is one of the important things to consider while investing. Higher the risk better the rewards, but it also has a downfall in loss of capital. So, an investor should calculate its risk before investing in stocks, whether the stock falls in their risk profile. But with bonds, the risk is quite moderate, and the result is expected.
- Capital Gains:
It is one of the most important reasons for investing in the stock market. The stock market tends to provide larger gains, in case an investor is invested for a long amount of time. That’s why the stock market is one of the best ways to make money in the long term. But it also depends upon the choice of stocks.
One of the best ways to make money in stock is through dividends. Good quality stocks not only rise in value over time but also provide you regular earning income. It’s like a property that has the option to rise in value but also provides you the regular payment through rental income. In case, if anyone holds stocks for a longer period then they also get tax benefits.
- Lots of Choices:
The stock market provides you diversification within a single investment. So, anyone can invest in diverse stocks whether it’s large-cap, mid-cap, or small-cap. Each one of them has unique benefits. The large-cap provides stable pricing and good dividend, whereas the mid-cap stocks provide an excellent opportunity to become future large-cap stocks with better dividend and stock pricing. Small caps gave you the advantage to choose your multi-bagger opportunities. Since they are penny stocks, a small investment into a quality company can worth a lot after some time
Let’s look at the cons of investing in the stocks market compared to the bond market:
- Volatility: Stocks prices are highly volatile compared to the bond. The prime reason is that various factors affect stock prices such as company revenue reports, peer performance, and economic factors as well as mood and outlook of the market. But whereas in the case of bonds, interest rates, and economic outlook plays an important role in moving the prices either upward or downward.
- Costly to Transact: Stock trading is quite fast, easy, and quick, but certainly it’s not free. So, every time an investor buys or sells shares, it needs to pay a certain amount of transaction cost. Whereas in the case of bonds, that’s not the case. An investor will rarely trade as quickly as they trade stocks because the price movement of the bonds is less as compared to stocks.
- Too many choices: The stock market provides you a lot of choices. The choices can be boon as well as a curse at the same time. Sometimes too many choices create an illusion and may confuse investors where to put the money. A wrong choice can result in a big loss, but the bonds market is quite mature with a fixed number of choices.
- Tax benefits: Historically, the stock market performs much better than the bond in the long term. But if an investor is looking for a relatively stable return with minimum risk and tax benefits, then there is nothing better than choosing bonds.
An investor first looks out for the pros and cons of any security before investing in it.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing