Bonds and shares: A trader’s guide

Investing your money is a way to grow your wealth over time. Two of the most common investment options are bonds and shares. But what exactly are bonds and shares, and what are the differences between them?

This article provides an in-depth look at bonds and shares to help you understand these two key investment asset classes.

What are bonds?

A bond is a fixed-income investment where an investor loans money to a company or government for a set period of time in exchange for regular interest payments. The company or government issuing the bond is known as the bond issuer. When the bond reaches maturity, the investor receives their original capital back.

Characteristic of bonds

Fixed regular income: Bonds typically pay interest at regular intervals, such as every six months, based on a fixed interest rate. This gives bondholders a predictable income stream, making it easier to plan and budget for future expenses.

Lower risk: Bonds are often viewed as a safer investment than shares. This is because you essentially lend money to the issuer when you purchase a bond. Unlike shares, where you buy a piece of a company and face the ups and downs of its stock value, bonds are designed to return your principal upon maturity.

Guaranteed returns of capital: Most bonds come with the assurance that, at the end of their term, the original investment amount will be returned. However, it’s crucial to understand that this guarantee is contingent on the issuer not defaulting on their obligations.

Tradable securities: Bonds have liquidity in that they can be bought and sold on various financial markets before they mature. This allows investors to adjust their portfolios as needed or access their investments early if necessary.

Issued by corporations and governments: While various entities can issue bonds, the most common are corporations and governments. Corporate bonds typically finance company operations, while government bonds are used to fund public projects or manage national debt.

Seniority for repayment: In the unfortunate event that a company faces financial distress or bankruptcy, bondholders are higher up the ‘ladder’ when it comes to repayment. They are prioritised over shareholders, making bonds slightly safer when considering potential defaults.

Rating agencies assess creditworthiness: Several reputable rating organisations, including S&P, Moody's, and Fitch, evaluate the creditworthiness of bond issuers. Rating agencies determine creditworthiness. Investors can assess a bond's risk using these ratings; higher ratings indicate a reduced probability of default, and vice versa.

Bonds allow investors to earn regular income while preserving their capital over the long term. They tend to be a lower-risk option than shares.

You can explore an extensive selection of bonds on markets.com, a premier platform renowned for its contract for difference (CFD) trading services. Browsing through their offerings, you’ll find diverse investment opportunities tailored to new and experienced traders.

You might also like to read: What is the main difference between CFD and share trading?

What are shares?

Shares, also known as stocks or equities, represent ownership in a company. By buying shares, you become a part-owner of that company. Companies issue shares to help raise capital for growth and expansion.

Some key features of shares

Ownership stake: Shares constitute basically a purchase of a portion of a company. The number of shares you own determines what percentage of the company you own. This indicates that you have a stake in the company's development and success as a shareholder.

Voting rights: Holding common shares often comes with the privilege to vote on significant company matters. This may involve corporate moves like mergers, business acquisitions, or other actions. Additionally, shareholders have a significant influence on the board of directors, who are responsible for the company's strategic decisions.

Claim on profits: As a shareholder, you stand to benefit from the company’s successes. This benefit can come in the form of dividends, which are regular payouts from the company’s profits, or through the appreciation of the stock value as the company grows and becomes more valuable.

Higher risk than bonds: Shares have no guarantees, in contrast to bonds, which have a fixed interest rate and a return of principal upon maturity. Depending on a number of factors, their value can increase, but it can also decrease. They may be more volatile as well as risky investments as a result of this lack of security.

Tradable on exchanges: Company shares are usually listed on stock exchanges, making them accessible for trading by the public. This listing provides transparency in pricing and ensures a regulated environment for buying and selling shares.

Limited liability: If a company faces financial troubles or even bankruptcy, shareholders are protected because they won’t be held responsible for the company’s debts. Their potential loss is confined to the amount they’ve invested in the shares.

Price reflects company performance: A company’s stock price is often a barometer of its overall health and future prospects. Strong financial performance, growth strategies, and positive market sentiment can increase stock prices. At the same time, challenges can cause it to drop.

Liquidity varies: Not all stocks have the same ease of trading. Blue-chip stocks, or the shares of big, well-known corporations, are often simple to buy or sell. However, shares of smaller businesses or those operating in specialized industries may be less liquid, making it more difficult to sell them at the ideal price or moment.

Comparison between bonds and shares

Now that we’ve outlined the basics of bonds and shares, what are the major differences between these two asset classes that investors should know about?

• Ownership: Bonds represent debt, while shares represent equity ownership.
• Income: Bonds pay fixed interest, while dividends from shares vary.
• Risk: Shares carry a higher risk than bonds.
• Issuers: Bonds are issued by governments and companies, while shares are issued by companies.
• Maturity: Bonds mature on a set date while shares are outstanding indefinitely.
• Priority of claims: Bondholders get paid before shareholders.
• Upside potential: Shares have higher capital growth potential than bonds.
• Price volatility: Share prices tend to be more volatile than bond prices.
• Defaults: A bond default wipes out the principal while a shareholder maintains ownership after bankruptcy.

Shares represent ownership interest and higher growth potential but more risk. Bonds offer fixed income with lower risk but less upside potential. Whatever you prefer depends solely on your knowledge of the assets and your trading strategy.

Expand your understanding with this write-up: Recession Proof Stocks CFDs and Other Assets

Bonds and Shares: Which is right for you?

So, which asset is suitable for your individual needs and financial objectives - bonds, shares or both? Here are some factors to consider:

Your risk tolerance: Shares carry more risk than bonds due to their potential for more significant price fluctuation. It’s essential to introspect and determine the level of volatility you can endure. If the thought of substantial price swings makes you uneasy, you might lean more towards bonds.

Income needs: Bonds, especially those with fixed interest, can be a source of predictable income. On the other hand, dividends from shares are not guaranteed and can fluctuate based on company performance. Bonds might be more appealing if regular and consistent income is crucial for your financial plans.

Time horizon: Shares align well with long-term financial objectives, given the potential for capital appreciation over time. Conversely, with their maturity dates and fixed returns, bonds cater to those with nearer-term income or financial goals. It’s pivotal to match your investments with the time frame of your financial targets.

Diversification: It’s often said, “Don’t put all your eggs in one basket.” This is the essence of diversifying your portfolio. You can mitigate risks associated with one asset class by allocating funds to both bonds and shares. A well-diversified portfolio can balance growth (from shares) and income stability (from bonds).

Market conditions: The broader economic landscape and specific market dynamics can influence the attractiveness of bonds and shares. For instance, in a bullish market, shares might seem promising.

At the same time, in a downturn or uncertain environment, the relative safety of bonds might be more appealing. It’s always wise to stay informed about market trends and adjust your strategy accordingly.

It is important to note that your financial situation will determine your portfolio’s right mix of bonds and shares. Conservative investors and traders may prefer more bond exposure, while those willing to take on risk may favour shares. Many financial advisors recommend holding at least some exposure to both asset classes.

Start trading bonds and shares at markets.com today

You have learned a lot about bonds and shares. If you are ready to step into trading, now is the perfect time. You can trade bonds and shares in one of the best CFD trading platforms, markets.com. In CFD trading, you will be speculating the price of your chosen bonds and shares without having an actual asset.

Our platform offers live customer service that will accompany you throughout your trading. You can also practise trading by using a demo account. You can navigate our platform and practise your strategies using a demo account without losing capital.

Become a member of markets.com and access a cutting-edge trading platform!

When considering “CFD bonds and shares” for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”