What investment considerations might influence someone to invest in stocks rather than in municipal bonds?

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pohnpei397 eNotes educator| Certified Educator

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.