Stocks or Bonds, the battle of the products.

Many clients ask the difference between the two most common financial products of the capital markets, should it be stocks, or should it be bonds?

The technical answer is quite simple, these two products are quite different one from each other and as expected, they come with pros and cons.

The stocks reflect a company’s capital and overall expansion. Stocks represent a clients “share” in a publicly listed company. Stocks are like a marriage certificate between the investor and the issuer, for better or worse.

Stocks generate, when the issuer is successful, capital gain. In a loose translation this would be defined as the profit an investor receives after re-selling the stock after a period for a greater value than the one of purchase. Some companies also offer yearly or quarterly dividends to their investors. The pros of such investments are that the investors are able to receive huge rewards for their investment. And just like that, with a simple word like “investment” we reach the cons. Stocks are profitable only as long as the issuer is profitable, in sickness and in health. Stocks can fall with half the speed of light if the issuer is not fulfilling his fundamental duty of running the business as he should.

Bonds, on the other hand, are safer, they represent the promise of an issuer to pay a yearly return of the bond’s sale price. Bonds are a way for publicly traded companies or even governments to borrow money from the general public. In essence, this is one of the simplest types of investment, you buy and wait. Bonds are issued with a maturity time span depending on how attractive the issuer wants its bonds to be. The pros are obvious, bonds are simpler to understand, do not need a complex due diligence and once they have been bought, there is not a lot to do extra. The cons come in the form that profits will always be static. Bonds are a promise on fixed return thus they are not highly profitable, and they cannot be used as a hedge against inflation.

Now, don’t get me wrong, just a few words on the matter can’t answer such a complex question and this debate has been for years one of the main strategy generators for money managers around the world.

But, as a simple answer, diversify. These products have been created to work hand in hand and if the proportions of your investment are calculated taking into account risk, hedge and product structure you should be just fine.?