Bonds and shares are the most commonly traded instruments on the market trading landscape. There are various factors that make the two stand apart from each other.
Let's look at nomenclature first. After all you need to get the basics right.
As the names suggest, bonds are traded on the bond market and shares in the share market. The bond market is also known as debt market or the credit market. The share market may also be referred to as the equity market. To understand the two markets it is important to delve into the differences between stocks and bonds.
Your status as an investor also varies depending on whether you are investing in the bond market or the stock market Buying a given company's stock makes you one of the company's shareholders for the period of time that you hold the stock. Conversely buying a company's bonds refers to a loan extended by you to the company and means that the company owes you a debt. However both bonds and shares are traded on markets where their value fluctuates constantly.
Two examples that might help you understand is are on one hand you and your group of friends who are renting a holiday villa together versus you lending your friends money to take his girlfriend 9n a vacation. The example of the group of friends can be likened to shareholding whereas the example of the friend you lend money to can be likened to bond holding. In the first instance you all pool in money and get to enjoy the pool, the TVs, the pool table, the beautiful view and the gardens as you all share the holiday villa. You get a share for what you pay. In the second case, you most certainly do not get a space on the couple's vacation. However, you do get your loaned money back later.
Bonds and stocks can also be differentiated by the issuing body:
Bonds may be issued by the government and government institutions, by municipal bodies and by financial companies. Stocks are issued by corporates.
Bonds come with a fixed date of maturity. Shares on the other hand have no such feature. Traders may buy and sell them as desired. However readers may also sell off a bond prior to its date of maturity.
Bonds and stocks differ drastically when it comes to rewards. In addition to a fixed date of maturity, bonds also come with a fixed rate of interest that is mentioned at the time that the bond is issued. Stocks may earn dividend but there is no promise or guarantee of such a reward.
The risks linked to investing in stocks are seen to be considerably higher. If for any reason a company had to be liquidated, bond holders enjoy priority over shareholders. As the company's creditors they will be paid back first whereas, shareholders - who enjoy part ownership of the company - get the last claim to residual capital.
Earnings are more regular with bonds because the issuing government or financial institution is compelled to make regular interest payments to bondholders according to the terms of their agreement. However with stocks, there is no guarantee of dividend. While bondholders earn from interest, stock traders earn from buying shares at a low rate and selling them at a higher rate.
The rate of interest earned on a bond is usually not very high and they are seen as long term investment options. Although some people might invest in stocks for the long term, the most common types of investors in the stock market are day traders a (who buy and sell their stock within a single trading day) … and swing traders (who complete their buy-sell process in a matter of a few weeks.)
The bond market in India is fairly nascent as compared to the stock market. Individual investors rarely trade on the bond market whereas stock market traders often operate independently. So how do individual bond investors go about their business then? They will usually invest via a bond fund or via a mutual fund. These bond funds are managed by experienced asset managers. Mutual funds hire the best brains in the business to manage these bonds.
Some examples of bond funds include HDFC Corporate Bond Fund, Franklin India Corporate Bond Fund and, Sovreign Gold Bond and Indian Railways Finance Corporation Tax Free Bonds. Examples of stocks include Adani Green Energy, Nestle India Ltd and Larsen & Toubro Ltd.
Whether you choose to invest in stocks or in bonds, it is important to note that since stock prices are constantly fluctuating and the face value of bonds too is constantly fluctuating, you need to make yourself aware of risks and also only take on as much risk as you can manage. Understand the risks and take time out to sit down and calculate your risk appetite before investing.
Moreover, conduct research on any company or institution to evaluate its financial health before you invest. Stocks can be very lucrative but it is important to study their historical performance before investing. A trading app like the Angel Broking app can give you access to such information. Bond funds like all mutual funds are subject to market risks. Evaluate past performance before investing. Always do your research.