Stocks VS. Bonds

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When discussing investment portfolios, you will often hear about stocks and bonds – but what are they exactly?

Stock, or equity, represents partial ownership of a company. You can potentially make money through stock through dividends and/or capital appreciation. A company will often make payments to shareholders via the company’s earnings. Capital appreciation represents an increase in value from the price the stock was originally purchased for.

However, should a company do poorly, there is also the potential to lose money. Companies are not required to pay out the earnings to shareholders and can decide to reinvest the earnings internally. There is also a possibility that a stock’s value will decrease from the price it was originally purchased for.

The value of a stock will also fluctuate with changes in market conditions. Stocks typically fluctuate in value more than bonds.

Bonds, or fixed income, represent debt of a government entity or corporation. When you buy a bond, you are essentially loaning money with the promise of being paid back at a later date. Often you will also receive interest for this “loan”. The fixed part of “fixed income” is the typically fixed interest rate associated with the loan. Bonds are issued by federal, state, and local governments, agencies of the U.S. government, and corporations.

One of the biggest risks to bonds are changes in interest rates. As interest rates rise, the value of existing bonds typically falls because you can now get a higher interest rate on new bonds. As interest rates fall, the value of existing bonds typically rises because you would now get paid a lower interest rate on new bonds. Another risk to bonds is default – the issuer of the bond fails to pay interest or repay the loan on the due date.

Some of the primary vehicles used to invest in stocks and bonds, in addition to purchasing a stock or bond outright, is through mutual funds and ETFs.

With both stocks and bonds there is a relationship between risk and return. Generally speaking, the higher the risk undertaken, the higher the potential return. Work with your advisor to determine what level of risk you are comfortable taking on as well as the investment objectives you are looking to achieve. Your advisor can assist you in ensuring the proper exposure to stocks and/or bonds for your unique situation.

Together, we can work to keep you on-track towards your financial goals. Request a consultation with us to learn more. skyeburstwealth.com

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