Bonds and stocks are two investment instruments that are quite popular and the demand is quite high. For those of you who are just getting into the world of investing, bonds and stocks can still be confusing about the difference. Well, therefore, on this occasion we will discuss about investing in bonds vs stocks if you are still confused, let’s look at this article carefully.
The reason is, both of them are securities that can be traded on impact exchanges and capital markets. Not only that, bonds and stocks are also both vehicles for obtaining capital for the benefit of the company and investing in bonds vs. stocks.
Come on, Get to Know the Difference between Bonds and Stocks as Investment Instruments
If you want to get the maximum profit from investing, you need to be clear about what bonds and stocks are. This is also so that you don’t choose the wrong investment instrument according to your investment goals. Therefore, you need to understand the meaning of bonds and stocks and also their similarities and differences. Come on, see the explanation.
What Are Bonds and Stocks?
Bonds are transferable medium-long-term debt securities. The content is a promise from the issuer of the bond to pay the reward in the form of interest in the exclusive period. The issuing party will also pay off the principal of the debt at a predetermined time to the buyer.
Bonds are issued by companies or governments as a form of borrowing money. Companies that issue bonds mean that the bonds can be bought. If you as an investor buy the bonds, you will get a payment of the principal of the debt and interest or called a coupon.
Stock passes are the participation of the capital of a person or party (business entity) in a company or limited liability company. By including capital, the party has a claim or right to the company’s income, claims on the company’s assets, and is entitled to be present at the General Meeting of Shareholders (GMS).
Shares are a form of ownership of a company. A company that issues shares means that the company sells its ownership to another party. If you buy shares, you are entitled to a company profit or profit called dividends, adjusted to the number of lots of shares you own. Lots are units used in stock trading in the capital market.
Bond and Stock Equation
As already mentioned, bonds and stocks are securities that can be traded. Both have some similarities that you need to know. There are at least 3 similarities between bonds and stocks.
1. Both Securities
Bonds and stocks are securities issued by companies, be it government or partisan. This securities also means a form of black on white agreement that both parties have certainly agreed to.
2. Gives Profit
Owners of bonds and shares have the right to the profits and assets of the company. This is because both investment instruments are securities in order to be able to provide profits or income to their owners.
3. Have Redemption Rights
If you buy bonds or stocks, you will get redemption rights. That is, you can exchange stocks and bonds for money. Companies that issue bonds and stocks must also give additional money according to their value.
Bond and Stock Disparities
After understanding the similarities, you also need to understand what the disparity of bonds and stocks is. There are several disparities between the two such as bondholder rights and stocks, the prevailing era, profits, and taxes. Here’s the explanation.
1. Standing of Bond and StockHolders
Bondholders and shares have different standings or rights. Bonds are debt securities or proof of debt so that bondholders only have proof of receivables. Therefore, bondholders do not have rights to the company.
The timing of the shares is proof of ownership of the company so that the shareholders have rights to the company. Shareholders have the right in the General Meeting of Shareholders (GMS) to interfere in company policies.
2. Validity Period
The disparity of bonds and stocks was finally in the age of enactment. Bonds have a predetermined period of time until maturity. During the era, unlimited shares were applied. You can own the shares until the next time as long as the stock issuing company is still there and you are not selling the shares.
3. Profit Sharing
Bonds and stocks have different profit sharing. The profit obtained on bonds tends to be fixed because it is based on the interest and principal of the loan set. In stocks, shareholders will get an uncertain level of profit, depending on the profit obtained by the company and the amount of share ownership.
4. Taxes Imposed
The profits obtained from bonds are not taxable. This is because bonds are included in the cost of the company. Bond interest has been issued first as a cost so as not to be taxable. The profit pass from the shares is taxed.
Shareholders benefit from dividends (Company profits). Dividends include income so they are taxed. When they get a profit share, the Investor receives dividends that have been tax deducted.
Bond and Stock Risk
In terms of risk, bonds and stocks also have disparities. This risk can be a consideration if you want to make an investment.
There are 3 bond risks, namely default risk, capital loss, and liquidity risk.
Risk of default. This risk may be very large for companies. The company may fail to pay the maturing bonds. When buying bonds from government companies (BUMN) get collateral from the state.
Risk of capital loss. Capital loss is when an investor loses money because the bond is sold lower than the purchase price. This happens among other things due to changes in interest rates, political economic cases, and others.
Liquidity risk. This risk occurs when bonds are difficult to resell in a short period of time. If it is sold before maturity, the investor will lose out. This circumstance makes bond investments insufficiently liquid.
While there are 5 stock risks, namely the risk of not receiving dividends, suspending, delisting, bankruptcy companies, and market fluctuations.
Did not receive dividends. This can happen when the company you are investing in suffers losses. Since no profit is made, investors also do not receive dividends.
Risk of suspension. Investors can lose money when the company is dismissed by the Indonesia Impact Exchange (Bei) and the Financial Services Authority (Ojk). The reason is that the company is cheating and violating capital market provisions, such as increasing stock prices in an improper way.
Risk of delisting. Investors also lose money when companies delist. Delisted companies are no longer allowed to play in the capital market because they are always losing money or getting involved in problems.
The company is bankrupt.
The company could have defaulted due to bankruptcy. This makes investors lose money because the investment funds will be lost.
Market fluctuations. Another risk of stock investing is the presence of market fluctuations. The stock price depends on market sentiment so the price will continue to change. Although it includes risks, this condition can be an opportunity to make a profit.
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Planning Bonds and Stocks
After you understand what bonds and stocks are and also the similarities and differences, the next step is to choose which investment is suitable for you. The answer, the first one, depends on the purpose for which you invest. You need to have goals and conscious planning when investing. How long you want to invest and how much profit you want.
After that, make sure the risk burden that you can bear. If you can bear the high risk, you can choose stock investment. Stock investment is an investment that is high risk high return. The risk is high, but it is proportional to the results obtained.
If you can’t bear the high risk and want to be conducive, you should choose bond investment. Bond risk tends to be minimal. Moreover, if the bonds are issued by the government, the risks tend to be non-existent.
These two investment instruments have similarities and also disparities. Each of them also has its advantages and disadvantages. Whichever you choose, bonds and stocks both add profit. Make sure your chosen investment is tailored to its goals and risks.
Well, that’s a review that discusses investing in bonds vs stocks before you make an investment first recognize what is obigation, stocks so that you know what the difference is, hopefully this article will be useful and thank you.