When a person talks about investing their funds, the most obvious choices for investments are shares and bonds. Now it is common knowledge that shares are riskier than bonds and they cater to diverse groups of investors. Therefore, for effective decision-making, it is essential to know the correct meaning and important features of shares and bonds and make suitable investment decisions. Given here is a brief discussion of the same and the key differences between shares and bonds.
Read More: What are the differences between equity markets and debt markets?
What is the meaning of shares and their features?
In simple words, shares are the portion of equity held by the shareholders which also represents the ownership of the company. These shares can be in the nature of common shares, preference shares, convertible or non-convertible shares, etc. The key features of shares are mentioned below.
- Shares represent partial ownership in a company, and the more shares you own, the higher your ownership percentage.
- Dividends are a portion of a company's profits that may be distributed to shareholders based on the number of shares they own.
- Shareholders can exercise voting rights to participate in important company decisions like electing directors or approving major actions.
- Shares can experience capital gains or losses as their value fluctuates over time, allowing for potential profits or losses when sold.
- Shares are relatively liquid and can be easily bought and sold on stock exchanges, although their prices can vary based on market demand.
- Investing in shares carries risks as their value can be influenced by market conditions and company performance, with potential for both gains and losses.
- Diversifying investments across different companies and industries through shares can help mitigate risk in case of downturns affecting specific investments.
What is the meaning of bonds and their features?
Bonds are financial instruments that represent a form of debt. When you invest in a bond, you are essentially lending money to the issuer, which can be a government, municipality, or corporation. There are various types of bonds available in India, including government bonds (issued by the central or state governments), corporate bonds (issued by companies), municipal bonds (issued by local government bodies), and debentures (long-term bonds issued by corporations). The purpose of issuing bonds is to raise capital for various purposes, such as infrastructure development, expansion projects, or financing government expenditures. When you invest in bonds, you become a creditor of the issuer. In return for lending your money, the issuer promises to make regular interest payments at a fixed rate, known as the coupon rate. Bonds have a specified maturity date when the issuer repays the principal amount. Bonds provide a predictable income stream, making them appealing to investors seeking stable income.
Some of the key features of bonds are highlighted below.
- Bonds offer the convenience of fixed income at a coupon rate that is declared at the time of investing. This coupon rate is a percentage of the bond’s face value and is paid on an annual or semiannual basis or as per the agreement between the issuer and the investor.
- Bonds are issued for a fixed maturity after which they are redeemed and the principal amount invested along with the accrued interest income is credited to the investor.
- Bonds are less riskier as compared to stocks as they are less volatile, however, they do carry risks like default risk, credit risk, interest rate risk, liquidity risk, etc.
- Investing in bonds is an excellent way to diversify the investment portfolio to reduce the overall risk of investing and also have a more stable source of income along the way.
What are the key differences between shares and bonds?
Now that we know the basic meaning and features of shares and bonds, let us now focus on the key differences between the two.
Shares and bonds are like two opposite ends of the investment spectrum and they are both equally crucial for a balanced investment portfolio. The mix of shares and bonds in the portfolio can be influenced by factors like risk perception, returns expectations, investment goals, and investment horizon.
We hope this blog was able to provide you an in-depth understanding of shares and bonds and thereby aid in shaping your investment portfolio.
Let us know if there are other common terms in the stock markets where you need a detailed understanding and we will take it up in our coming blogs.
Till then Happy Reading!