The difference between stocks and bonds

In the world of investing, you have different investment products, such as stocks, ETFs, cryptos, real estate and bonds. But what exactly are they, bonds? And what is the difference between stocks and bonds? We’re going to explain that to you. All with the goal of making you a smart investing lady!

Note that investing, whether in stocks, ETFs, real estate or bonds, involves risk! You may lose some of your deposit. So invest only with money you can spare. Promise?

Psst: read this article that goes into more detail about exactly what bonds are.

Shares

Shares are very small pieces of a company. So when you buy shares you are part-owner of the company. If a company makes a profit, you often benefit from it in the form of dividends. And if the underlying stock price rises, you benefit from the price increase. The dividend is always positive, after all this is company profit, but a share price increase can also be a share price decrease, for example if the company or the economy is doing badly. If you bought a stock for 100 euros, and it is now worth 90 euros per share, you make a loss of 10 euros per share related to the drop in price.

Read more about dividend stocks here!

Loose stocks or ETFs

You can buy individual stocks of companies, or a basket of stocks of different companies through an ETF. You can do this at DEGIRO and BUX Zero, for example. How risky stocks are depends on their volatility. In general, stocks are more volatile – more moving, more risk of price rises as well as falls – than bonds.

Bonds

Because, we come to bonds: this is a loan you make to a company or a government. You lend money, for a certain period of time, and you get the pre-agreed interest on the amount lent each year. When the term of the loan is over, you also get your entire deposit back. Mostly then.

Lower risk

Buying a bond is generally considered a low-risk investment because companies and governments to whom you lend money are generally quite stable. This is offset by less fat gains. The general maxim is: the lower the risk, the less the profit. With stocks and other more risky investments, this fact often applies the other way around as well: the higher the risk, the more chance for hefty returns, or fat tears. No guts, no glory.

Should a company go bankrupt, bondholders are first in line to get their money back. Only after that will it be the shareholders’ turn.

Other forms of loans

When people think of bonds, they often think of government or corporate bonds. But there are other ways to provide a loan and receive a return on it. Consider, for example, some crowdfinance projects. What this means? The word actually says it all: the crowd(a large group of people) together provides the financial resources needed to fund a business. This can be funding for a charity or social cause, the start-up of a new company(startup) as well as financing established entrepreneurs.

Read more about crowdfinance in this article.

Creditworthiness

Important to know should you want to buy bonds: keep in mind the so-called credit rating. A label has been developed for this and creditworthiness is indicated by letters. If a bond has an AAA, AA, A or BBB label then this loan is considered less risky. For example, Dutch or German government bonds: the probability of these states going bankrupt is very small. All bonds below label BBB are considered risky(er).

Although the interest rate on your bond is fixed, the value of your bond can change over time. So bonds are also volatile, but less so than stocks. Supply and demand, European Central Bank policy and interest rates largely influence bond prices.

Hold or sell?

If you hold a bond until it matures, you know you’ll get your deposit back. But if you sell a bond before its maturity, then you have to deal with the price at that time. It may be lower or higher than when you started. Similarly, when you buy and sell bonds, you can make a loss or a profit.

Conclusion

It may be smart to include a mix of stocks and bonds in your portfolio. You can easily create this yourself by investing in funds through Brand New Day, for example, or buying your own bond ETF at BUX Zero.

Again, what the exact ratio of stocks versus bonds should be depends on your personal situation. The general maxim is that you should invest your age in bonds because they carry less risk, and the older you get the less risk you want to run with your assets. Simply because you have less time to make up losses.

If all goes well, you now know the difference between stocks and bonds, and that both can be valuable in your investment portfolio. Also check out this video where an experienced investment manager talks about investing in bonds.