While stocks and bonds are two completely different asset classes, some features are common to both. Choosing the best stocks and bonds to invest in is a challenge, considering the size of the financial markets, where trillions of dollars worth of securities are traded. Nonetheless, by identifying characteristics shared among certain stocks or bonds, you can streamline the process and select the most appropriate investments for your needs.
Stocks are equity shares issued by corporations. In exchange for buying shares, investors receive some ownership in a company. Stocks offer investors the ability to participate in profits but also introduce the risk of financial loss. Bonds are issued by governments, municipalities or companies. Issuers provide steady income to investors for the length of a bond contract and repay the principal amount once the bond matures. Investors generally turn to stocks for the greatest profits and bonds as a safeguard against loss.
Industry leading stocks with a market capitalization worth more than $8 billion are among the most conservative choices for investors. While fast profits can often be earned by less mature companies that are growing more quickly, bellwether stocks can usually provide reliable performance that can otherwise be difficult to find in the equity markets. In the bond markets, the safety that Treasuries provide reflects the credit quality of the government. Investors may not earn the highest yields from U.S. Treasuries, but historically don't need to worry about a government default.
Stocks with a market capitalization worth less than $1 billion are lacking the same financial strength of large companies to withstand weakening market conditions. As a result, small-cap stocks can be quite volatile, which makes them risky, according to Fidelity Investments. Investors looking for the highest-yielding bonds may turn to those rated below investment grade, or junk bonds. Compared with U.S. Treasuries, junk bonds produce attractive yields but are at a high risk of default. Nonetheless, investors directed a record $293 into junk bonds in 2012, according to a 2012 article on the New York Times website.
Growth stocks have demonstrated proven earnings and have a high stock price to show for it. Growth investors expect that profit growth will continue, and that the stock price continues to rise to reflect that earnings performance. Considering that one of the vulnerabilities in bond investing is inflation because it diminishes the value of a bond's principal, inflation-protected bonds offer investors some security. The prices on Treasury Inflation-Protected Securities (TIPS), a bond type, change alongside inflation so that the principal is not compromised.
Video of the Day
- Burke/Triolo Productions/Brand X Pictures/Getty Images