Investing in Bonds or Stocks? Find out which is best for you

Investing in Bonds or Stocks? Find out which is best for you

Bonds or Stocks: Find out if they are right for you.

Are you ready to dive into the exciting world of investments? one question that always comes up is: should I invest in bonds or stocks? It's a classic debate with no definitive answer, but fear not! In this article, we'll explore the pros and cons of both options, helping you make an informed decision about where to put your hard-earned money.

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  • The bond market is much larger than the stock market. 
  • Bonds have always been considered less risky than equities. 
  • Investing in certain types of bonds even outperformed the S & P500 equity index.
  • There is an inverse relationship between stock market trends and bond market trends.
  • An informed investor should reserve an adequate percentage of his portfolio for bond investments
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Ready to find out all about Bonds and Stocks? Read on!

Which are better: bonds or stocks? Take a look at our comparative analysis

The search for profits through the trading of financial assets can be realized not only in the stock market but also in the bond market . However, the bond market does not arouse the same enthusiasm among investors and traders as the equity market. However, we must take more into consideration because both investment choices have both positive and negative sides. Let's briefly see what are the main characteristics and the major differences between the two markets. Will it be better to invest in stocks or bonds?

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Equities VS bonds

The size of the markets

In 2019, the total capitalization of the world stock market was equal to 95 trillion dollars against the 106 trillion of total residual debt of the bond market (source US-Fact-Book-2020-SIFMA ). 

The reasons for this difference are as follows: 

  • The pool of potential issuers is much larger for bonds than for stocks. In fact, while the share price is reserved only for private companies, financing through the issue of bonds is also the prerogative of local entities (so-called municipal bonds ), sovereign states (so-called Treasury or sovereign bonds ) and supranational bodies, such as for example the World Bank and the International Monetary Fund ( IMF ).
  • Large institutional investors (pension funds, mutual funds, insurance companies, banks, etc.) need fixed income assets in which to invest their large amounts. In fact, their purpose is not to earn from short-term trading but to deposit their capital in a “safe haven”.  

Financing by issuing bonds is much cheaper than listing on the stock exchange or a capital increase.

Market regulation

Unlike the stock market, the bond market is an over-the-counter market . In fact, while the shares of the various companies are exchanged in centralized and regulated markets, the purchase and sale of bonds can also take place through a private transaction between the issuer and the buyer (so-called Private placement ) .

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Risks and returns

Bonds have always been considered less risky since they provide a predetermined return and the certainty of the return of the capital invested at maturity. The shares, on the other hand, do not offer any guarantee of return of capital. However, in the medium to long term they should be characterized by higher average returns. In the face of a higher expected return, however, shares have a higher average volatility and therefore a higher exposure to market risk . However, recent empirical studies have shown that this assumption is not always verified in every historical period and for any type of obligation

An interesting article published in the New York Times last May 2020 highlighted how in the period 2000-2020 the investment in some types of bonds (long term treasuries and long term corporate bonds) even outperformed the share index S & P500

Risk assessment is also easier for bonds as higher quality issues have a rating assigned by at least one of the major rating companies (Standard & Poor's, Fitch, Moody's), which expresses the implied probability of default. of the title. 

Why are they linked with the business cycle? 

There is usually an inverse relationship between the performance of the stock market and the performance of the bond market . During the expansionary phases of the economic cycle, consumption is sustained, companies make higher profits, investor confidence grows and equities appreciate. There is, therefore, an outflow of money from the bond market to the equity market. During the recessive phases, however, the opposite occurs. This link between the performance of the real economy and financial markets has been partially distorted in recent years by the expansionary monetary action of central banks.

Bonds or Stocks: conclusion

In conclusion, we can say that an informed investor should reserve an adequate percentage of his portfolio for bond investments commensurate with his level of risk appetite. In fact, investment in the two asset categories has in the long term a fundamental function of stabilizing expected returns. Furthermore, by calibrating the bond investment on certain bond categories, yields even higher than those offered by the stock market can be obtained in the long term.

If you want to test yourself with investments in stocks, without wasting time or money, you can participate in the Alpha4All 1000 € Challenge at this link 

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Investing for Beginners: FAQ

How should a beginner start investing?

A beginner should start investing by first setting clear financial goals. Are you saving for retirement, a down payment on a house, or your child's education? Once you have a goal, you need to understand your risk tolerance. This will help you determine the right mix of investments. Next, open an investment account. This could be a retirement account like a 401(k) or an IRA, a taxable brokerage account, or a robo-advisor account. Once you've funded your account, you can start picking your investments. It's generally recommended to start with a diversified portfolio, which could include a mix of stocks, bonds, and mutual funds.

Is $100 enough to start investing?

Yes, $100 is enough to start investing. Many online brokers and investing apps have no minimum investment requirement, or if they do, it's very low. You can invest in individual stocks, ETFs, or mutual funds. Another option is to use a robo-advisor, which will create a diversified portfolio for you based on your risk tolerance and investment goals.

How to invest $100 dollars to make $1,000?

Turning $100 into $1,000 through investing requires time and patience. One of the best strategies is to invest in a diversified portfolio of stocks and bonds and let compound interest do the work. If you invest $100 in a portfolio that earns an average annual return of 7%, it would take approximately 30 years for your investment to grow to $1,000. However, keep in mind that investing involves risk, and the actual return could be higher or lower.

How do I start investing with little money?

Starting to invest with little money is easier than ever thanks to technology. Many online brokers and investing apps allow you to start investing with as little as $1. You can buy fractional shares of stocks and ETFs, which means you can own a piece of a company or fund without having to buy a whole share. Another option is to use a robo-advisor, which will create a diversified portfolio for you based on your risk tolerance and investment goals. Finally, consider setting up automatic contributions to your investment account. Even a small amount each month can add up over time.

Risk Disclaimer

need to rewite There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses.

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