money,baking and financial marketsWhat are the advantages of holding stocks in a company versus holding bonds issued by the same company?
A company's bond price is fixed in relation to interest rates. Because of these factors, there is strictly limited risk and a sure return on your investment. A company's stock price is set by the performance of the company in its market, research and development, debt to earnings ratio, and public perception. There are many variables affecting and driving stock price. Because of these factors and the resultant potential price volatility, there is potentially unlimited risk on the return of your investment.
When you purchase a bond from a company, you are essentially making a loan to that company, and like most loans, the contract you enter into entitles you to a fixed rate of return no matter what kind of profits the company makes. For this reason, bonds trade at lower costs than stocks, at least in normal markets. Stocks, on the other hand, have a theoretically unlimited payoff. If the company is successful, the dividend goes up, and the value of the stock on the market will rise past that of what is possible with a bond.
To my mind, stocks are more of a gamble, but they represent a gamble that can pay off spectacularly if the company that you own the stocks of performs well. Bonds are a safer investment involving less risk, but also less returns. Therefore if you are going to buy stocks you are going to have to have researched that company very carefully to be sure of its future success and growth.
The advantages of holding stocks are manifold. First, you can make more money, if the company goes up. Bonds are set. Second, you can get dividends, if the company offers them. Third, you can call sell options on the stocks that you hold. If you sell covered calls, then you can make more money through the premium you collect. Hence, the potential for money is greater.
The previous answer is correct. Let me just put this in two other ways. Put simply, you might make a lot more money buying stocks than buying bonds. Stocks can go up in price and make you money.
Put in more economic terms, there is a greater potential for return on your investment in stocks than there is in bonds.
You may be able to make more money buying stocks, but it is risky. Stocks go up and down when somebody sneezes. The markets are incredibly unstable, especially these days with the internet trading. Bonds at least will usually pay out, unless the company tanks.