Last updated on April 10, 2023
Valuing equities vs bonds for investment depends on investors’ decisions after their tradeoff consultations. An investor can prefer stocks over bonds because of the advantages. Equities could have more or even fewer advantages than bonds, depending on what the investor wants.
Equities Vs Bonds Advantages and Disadvantages:
Advantages of Equities over Bonds
1. High return
Stocks attracts higher return because of their high volatility. Their pricing could increase, and investors could sell their stock and make good profits after deducting what was invested. Fluctuation of stock could be so often, and thus an investor can make quite a significant amount over a short period.
A high-risk-taking investor should thus go for shares. They can make high profits within a very short period if the share price has observed a trend predicted by an investor. If an investor is quite informed, he can trade on the stock of different companies and make good profits by buying and selling different stocks.
2. Growing with inflation
Unlike bonds, stocks do not remain constant when there is inflation. There is a high likelihood that the market value will increase when a stock goes up. Thus, if an investor sells their stock during inflation, the stakes are higher to get the money that conforms with inflation and the prevailing cost of living.
This is advantageous over bonds because they will retain their constant market value and interest earnings even when living costs and inflation are high.
Investors considering the effect inflation will have on their principal invested should invest in stock. The value of their money is likely to increase with inflations, and thus, they will not lose, unlike in bonds where the return could be negative if inflation is high than returns.
3. High liquidity
When investors have put their money in equities, they can sell when they wish. When investors run a shot of cash, they can sell some or all their shares for liquidity purposes. Thus with stock, an investor will be more liquid to operate financially.
This is not the case with bonds because they are more of a funds commitment. One has committed their funds for a given period to mature. An investor trading in bonds thus has less financial liquidity. They can suffer financially when they run short of cash.
An investor who is cautious about their liquidity should invest in stock. In cases of a limited supply of cash, such investors can sell their stock within a short period and use the money for other purposes.
Disadvantages of Equities over Bonds
1. High fluctuation of returns (dividends)
Unlike bonds, the dividends paid to stock are not constant. A company might declare high dividend payouts at the end of a financial year and declare low or no dividends at the end of the following financial year. Equities thus lack inconsistency in return to shareholders in terms of dividends.
An investor who wants consistent returns should thus avoid the stock. Dividends declared for shareholders fluctuate so much, which is unstainable to some investors. An investor who desires constant returns should thus invest in bonds.
2. High risks
Stock fluctuates often, and the fluctuation margin could be high, especially against investors’ projections. The fluctuation margin from bullish to bearish stock price could be so high.
Thus, an investor who forecasted a bullish market could lose in case of a rapid bearing trend. This high risk makes the stock quite unattractive, especially to risk-averse investors. Stock is not a safe investment option for growing wealth.
Thus, investors should avoid stocks if they fear losing. The fluctuation margin could be so great in the opposite direction to that forecasted by an investor. It is thus better for an investor to invest in bonds overstock to avoid high volatility risks.
3. Losing principal amount in case of issuer collapsing
Shareholders tend to lose when a company that issued these shares is declared bankrupt. Any stock becomes valueless, and thus investors cannot earn from selling such stock or even paying dividends.
Before an investor subscribes to a company’s stock, they must do due diligence on its sustainability. It prevents their principal investment from being lost in the drain in case of company bankruptcy.
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