Candlestick Trading Blog

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Picking a good mix of stocks and bonds is the most basic forms of investing however, it is very difficult. The purpose of investing in bonds is to provide a steady stream of income.  The purpose behind investing in stock is to have the potential for long-term growth.  When investing in stocks and bonds it is important to develop and implement an investing strategy so that you can build a strong portfolio.

What are stocks?
To understand the difference between stocks and bonds, it is important to first understand the definition of stock. Shares of stock are the smallest unit of ownership that you can have in a company.  Owning shares in a company’s stock makes you part owner of the company.  This means that you have the right to vote regarding matters within the company such as who will be on the board of directors and other matters of similar significance. The value of that corporation’s stock will typically reflect the earnings experience of that particular firm, going up during periods of profitability and down during periods of loss. The higher the risk, the greater the potential for return. When considering investing in stocks and bonds it is important to understand that there is also limited liability that comes with stock ownership. This is because creditors only work directly with the company so they cannot come after shareholders. The worst that can happen is the company’s stock loses its value.

When investing in stocks and bonds, you must know that there are two types of stocks. These include common stocks and preferred stocks.

Common Stocks – As the name implies, common stocks are the typical investment asset in any company. While they don’t possess dividend rights or voting privileges, common stocks make up for it with profit potential. The fortunes that are made, and lost, in the stock market are usually made on the backs of common stocks.
Preferred Stocks – This form of shares offers some limited benefits to its holders. Holders of preferred stocks usually receive dividends; dividends are paid as a form of returning a portion of the company’s profits to the shareholders. Preferred stocks tend to be slow, stable investments that likely won’t net the holder great sums of many but will likely be a steady performer in a stock portfolio.

When studying the difference between stocks and bonds one must also understand the difference between blue chip stock and small cap stocks.

Blue Chip Stocks: Issues of companies who are well establish in their industry and who also have a reputation of producing earnings and paying stock dividends over a long period of time.
Small Cap Stocks: Issues of companies that are not as established, but have the potential for enormous growth for those successful companies. For those that do not perform well, however, means the potential for a decrease in the value of the stock producing a low return on investment.

What are bonds?

Now that you know the definition of stock, it will now be easier to understand the difference between stocks and bonds as explained here. When you purchase a bond, you are lending money to an issuer, and in return for that loan, the issuer promises to pay you a specific rate of interest during the life of the bond.  This is paid out by the issuer when the bond matures in order to repay the face value of the bond, otherwise known as the principal. When investing is stocks and bonds, it is important to note that bonds tend to be predictable in nature enabling you to count on a nice stream of payments and repayment of principal.  Issuers of bonds can include corporations, the government, municipalities, federal agencies or other entities.  Types of bonds can include municipal bonds, corporate bonds, U.S. government securities, federal agency securities, foreign government bonds, and mortgage and asset bonds. Now that you understand the difference between stocks and bonds, it is important to understand why investing in both leads to better investing.

Stocks and Bonds, why both?
Financial advisors will tend to recommend that investors maintain a portfolio consisting of stock and bonds, and cash in varying percentages in order to establish good portfolio diversification. Before you begin investing in stocks and bonds, be sure to understand the types of stocks and bonds available to you, as well as the risks associated.