Company Stocks vs. Corporate Bonds

Most people will understand what stocks are, and they may even be very familiar with them, although corporate bonds are nowhere near as well understood. Both these options will allow an individual to invest into a particular company, and therefore allow the company to use their money for business purposes. However, there are some key differences between company stocks and corporate bonds.

The main difference between company stocks and corporate bonds is what the investor will actually become once they’ve purchased one. By purchasing a share of stock in a company, an investor will become a part owner in that company. However, purchasing a corporate bond will simply see an investor becoming a creditor. A corporate bond will see a company actually borrowing an investor’s money and paying them interest for it. The company will, of course, eventually have to pay back the money that they have borrowed in full. With both company stocks and corporate bonds, an investor is giving the company money to work with, although there are major differences in the safety of these investments and the return that an individual can expect.

Investors will typically have their own tolerance for risk and very different desires for a return on the money they invest. This is also where company stocks and corporate bonds differ from each other. The main reason an individual would buy a stock is because they realize that there is the potential for a high return on their investment. If a company does particularly well stock values can increase dramatically, and it is not unheard of the investor to double or triple their investment.

A prime example of this was a number of investors who chose to invest in Google when it was in its infancy, and they all saw their stock price go up considerably. With that said, not only do stocks have the potential for huge returns, an investor could also end up with absolutely nothing. If a company was to go bankrupt, an investor will see their stock price go down to $0. Unfortunately, this will mean that their entire investment has gone and they have absolutely nothing to show for it.

Corporate bonds are a little different, as an investor is lending the company money, and that company agrees to pay the investor a certain amount of interest. The investor will receive a regular interest payment over the entire life of the bond. At the end of this term, the investor can cash in their bond and get their original investment back. Therefore, the investment potential of a corporate bond will have a cap.

It makes no difference how well a company does, as the investor will always get the same amount of interest, and this is what was agreed upon in the initial investment contract. Returning to the example above, any investors who had purchased corporate bonds in Google would not have got anywhere near as rich as many of the shareholders, as they would simply have received a regular interest payment.

However, it is important to realize that corporate bonds offer a far safer initial investment. It is extremely rare that a corporate bond will go down to $0, and even if a company filed for bankruptcy, creditors will be amongst the first people to get their money back. With that said, an investor will have a claim on the assets of the company and if it is found that that company is overleveraged, there may unfortunately not be enough money (assets) to go around.

Corporate bonds can be purchased through a broker, who will typically be able to buy bonds in the secondary markets. Corporate bonds can also be purchased through a bank or financial institution, but this is provided that they buy bonds on primary markets. There will be a commission charge of some sorts, and it is often recommended that an individual should consult with a financial adviser first. A financial adviser will have no stake in whether you purchase a corporate bond or not, and are therefore likely to give you far more impartial advice than a broker.

For anyone looking to develop a portfolio, they should definitely keep both investments in mind. Stocks have consistently outperformed bonds over the long haul, but it is widely accepted that bonds are a much safer investment. Therefore, in order to ensure that an investor has a balanced portfolio, they should consider purchasing several stocks, but also having a few bonds as a safe investment.

Comments are closed.