The pros and cons of stocks and bonds

Investing may seem like a daunting prospect for many with lots of complex terminology to get to grips with, especially whenyourhard-earned money is on the line. It’s important, however, to have some understanding of the different types of assets you can invest in if you are going to be able to take the right financial decisions for you and your loved ones. In this article, we will be going through two of the most common assets which people choose to invest in, bonds and stocks. We’ll briefly explain what these assets are and what to consider when thinking about investing in them.

Let’s start off with some definitions. When you buy stocks or equities, you are buying a share in a company, meaning you own part of the business you are investing in. Bonds, on the other hand, are a loan to a company or government.

The way you make money on your investments also differs. With stocks, as you are a part owner of the business, you will have the opportunity to share in the profits of the company through dividend payments. If the company does well consistently, the value of the company should also increase giving you the possibility of selling your stocks at a higher price than what you paid for them.

As bonds are a loan from you to a company of government, you make money by earning interest at a fixed rate over a specific time period, after which the initial sum is also paid back to you. If for some reason, you need to sell your bonds before they mature, you will receive the interest due up to the date you hold the bond. The price you get for selling a bond, however, will likely not be the same as the price you paid. This is because the price of bonds varies, particularly when interest rates change. If interest rates go up, the interest paid by the bond becomes less attractive meaning its price declines. The opposite happens if interest rates decline as the spread i.e. the gap between what you could earn in a savings, fixed-term deposit or Government Treasury Bills and the amount you earn from the bond, increases. Selling a bond before maturity is also likely to attract transaction charges.

Most investors opt to allocate money to both stocks and bonds, aiming to find the right balance between potentially more volatile but also more rewarding stocks and the steadier but less rewarding bonds. The amount of risk an investor is willing to take always plays a part in deciding which asset class to focus on and how much to allocate to each.

That said, it’s important to keep in mind that you could lose money in both stocks and bonds. The company or companies you invest in might not do as well as you think they will, meaning no or lower dividend payments and a decline in value. With bonds, the company of government you have lent money to might also find itself not in a position to fulfil its obligations and default. It’s therefore important not only to think about the risk of each asset class but also of the individual companies or bonds which you are thinking of investing in.

Working through what the best investment for you can be a difficult process so it makes sense to get some professional advice and to consult credible online resources which help you filter assets. Bonds are also subject to grading by global credit ratings agencies which can help you understand the risks you may be taking. At MeDirect, in addition to our advisory and model portfolio services, we offer a guided search facility through our mobile app and online banking portfolio to enable customers to explore their options and decide what is best for them.

Both bonds and stocks provide an opportunity for investors to grow their wealth. Their different characteristics mean they offer different risk profiles and return potential. Both can play an important role in a well-diversified investment portfolio.

MeDirect Bank (Malta) plc, company registration number C34125, is licensed to undertake investment services under the Investment Services Act (Cap. 370). If you invest in this product you may lose some or all of the money you invest. The value of any investment or income may go up as well as down and past performance is no guarantee of any future performance. A commission or sales fee may be charged at the time of the initial purchase for an investment. The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an adverse effect on your investment.


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