In the process of the development of human society and the formation of economic institutions, various instruments for investment appeared - the preservation and augmentation of wealth. When used correctly, they have helped and help to survive any crisis without losing your investment. The main investment instrument is stocks, but do not forget about the diversification of risks, and for this you need to use bonds.
A bond is a promissory note, a security that confirms that its owner has transferred funds to its issuer in the amount of its par value, which will be reimbursed to him within a certain period of time. Most often, a fixed percentage is also assumed, which will not allow the invested money to depreciate.
What bonds give companies
Any organization needs investment to get started. If there are no sponsors, working capital can be obtained by taking on debt obligations. A company can issue shares - also securities, which not only allow their owner to receive income in the form of dividends, and upon sale, receive their par value, but also participate in the management of the company, since he becomes its co-owner.
But if the issuer does not have his own money, he does not agree to share his property with someone and does not want or cannot take a loan, there remains practically the only legal method to get money - to issue bonds through the intermediary of a bank. As a result, the company receives funds for development, borrowing them from private investors, and at the end of the term established by the agreement, returns this money with interest.
The difference between a stock and a bond
So, the fundamental difference between these securities: a share is evidence that its owner has bought some part of the company and has the right to participate in management. The shareholder's profit grows along with the issuer's income. A bond is, in fact, an IOU, which implies a guaranteed return of the debt at a fixed interest rate. As a result, the income of the owner of the bond is fixed and does not increase in proportion to the income of the issuing company.
What is better and more reliable - stocks or bonds? Traditionally, it is believed that there are fewer risks associated with bonds. This is true, but only on condition of stable economic development in the country. If it is in a fever, uncontrollable inflationary processes take place in the country, all profits are "eaten up". Under the same conditions, shares do not lose their value, since their nominal yield only increases. Therefore, it is worth investing your money in bonds during periods of stability or stagnation. In the midst of the financial crisis, a large portion of the investment portfolio should consist of stocks.
And the last moment. Many people prefer to put their money in a bank for a deposit, believing that this is the most reliable way to save and increase money. However, in this regard, in terms of reliability, bonds are in no way inferior, while the interest rate on them is often much higher, which means the owner's income.
