What investment considerations might influence someone to invest in stocks rather than in municipal bonds?
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The investment consideration that would be likely to lead a person to invest in stocks rather than in municipal bonds is the desire for a higher return. Stocks have a much higher potential return than municipal bonds do.
When a person invests, they have to consider whether they want a high potential rate of return or if they want an investment that will not be much of a risk. Investments tend to have one of these characteristics but not both. When an investment is risky, it offers more of a potential return so that it can get people to invest. If the investment is not risky, it does not need to offer a high rate of return.
Stocks are fairly risky. There is no guarantee that a company will prosper. A company can go completely bankrupt and a person can lose their entire investment. Therefore, stocks have to offer a higher potential return. By contrast, municipal bonds are very safe. Governments rarely default on their loans. Therefore, municipal bonds typically do not yield a very good return.
Thus, we can see that a person who wants a higher potential return (perhaps someone who is investing money that they will not need for a long time) is more likely to invest in stocks than in municipal bonds.
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