What to invest in.
If you’re looking to invest in corporations, you should make sure that you understand the differences – and the different risks – of corporate bonds versus stocks. Both stocks and bonds are relatively common investment strategies, and while it is considered a good idea to have both in your portfolio, you should consider the differences between the two when you are deciding what bonds you want to buy. Keep in mind that in almost every case, stocks have a higher risk than bonds. That being said, both stocks and bonds are tied into the financial well being of the company that you buy them from, so you should only buy from stable companies.
When you buy corporate stock, you are not only making an investment in that company. You are also buying a share of the company. Therefore, technically and legally, whenever you buy stock, you are buying a partial ownership of the company that you’re purchasing stock from. Granted, unless you are going to buy a lot of stock, you will not have too much say in what that company does. However, in some cases, you will have a say in some of the managerial decisions regarding that company. Some corporations allow stockholders to vote on the board of directors if they would like to.
The price of stocks, while it is related to how well the company is doing, is entirely based on how much people are willing to pay for a partial ownership of that company. As a result, it is very easy for the stocks of a particular company to be very under or over valued. While bonds can also be overvalued, this is much more likely to be the case on the unpredictable stock market.
Bonds, on the other hand, are only an investment in the company. Instead of purchasing a part of the company, you are in fact loaning your money to the company for whatever it needs. Therefore, bonds are not directly linked to the financial well being of the company, unless there is a chance that it could go bankrupt and be unable to pay off the bonds that have already been taken out. If you’re worried about losing your bond money, you should make sure that you only buy bonds from companies with strong credit ratings, and stay away from junk bonds.
Junk bonds are bonds for companies with very low credit ratings. As a result, these bonds usually have a high yield – but there are also a lot of risks associated with them. Junk bonds are one of the cases when corporate stocks might be safer than corporate bonds.