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Buying Stocks Instead of Bonds: Pros and Cons

Jun-27-2022Blog by – Mr. Ashish AjmeraRead Time: 3 Min.Word Count: 545
23Buying Stocks Instead of Bonds: Pros and Cons
Stocks and bonds are the most commonly invested asset classes in India. However, investors
often wonder which is better – investment in bonds or stocks. Well, both have their pros
and cons. Here is your comprehensive guide to understanding the difference and investing
accordingly.

Meaning

Stocks are equity-based financial instruments. They indicate the interest of ownership given
to you by a company in exchange for funds. You are a shareholder and part-owner of the
company. Stocks are issued by corporations. You can trade them through centralized stock
exchanges.
Bonds are debt-based financial instruments. They indicate the debt taken by the issuing
body towards the holders with a promise to pay it back with interest at a later stage. You
are the bondholder and lender to the company. Bonds are issued by companies,
government institutions, and financial institutions. You can trade them Over The Counter via
a broker-dealer network.

Pros of Stocks

  1. The benefit of capital appreciation is when the stock prices increase or the company
  2. declares a dividend.
  3. High returns from stable and well-performing stocks.
  4. Wealth creation if the investment horizon is long.
  5. Voting rights in the company.
  6. Better liquidity than bonds as there is no lock-in period.
  7. Investors can trade in the global stock market.

Cons of Stocks

  1. Reduction in capital value when the stock prices go down.
  2. Value of stock changes as per the performance of the company.
  3. Uncertain income due to fluctuating share prices.
  4. No guarantee on the dividend.
  5. Relatively riskier investment due to stock market volatility.
  6. The principal amount may get eroded during high volatility and uncertainty.
  7. Dividends are taxable.

Pros of Bonds

  1. Fixed income due to fixed interest rate till maturity.
  2. Secure investment with lower default risk.
  3. Preference in terms of repayment during liquidation of the company.
  4. The principal amount remains safe.
  5. Most bonds do not impose tax liability on investors.
  6. The prices are determined by credit rating companies.

Cons of Bonds

  1. Lesser returns than stocks.
  2. Relatively less liquid than stocks due to the lock-in period.
  3. They can be held for a fixed period only.

As you may have observed, both stocks and bonds have their unique characteristics. Neither
of them is better than the other. Stocks offer high returns but are riskier in nature. Bonds
are a safer option but offer limited income. Your investment allocation should ideally
comprise both shares and bonds for a risk-return trade-off. The investment decision also
depends on several factors such as your financial goals, time horizon, risk appetite, etc. It is
always recommended to diversify your investment portfolio across a mix of equity and debt
funds.

If you are looking for a reliable online stock trading company to buy or sell stocks and
bonds, you can consider Ajmera x-change. It offers practical and effective investment advice
to maximize the returns and minimize the risks.

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