Pros and cons of stocks and bonds (2024)

FAQs

Pros and cons of stocks and bonds? ›

Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.

Stocks offer the potential for higher returns than bonds but also come with higher risks. Bonds generally offer fairly reliable returns and are better suited for risk-averse investors.

Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

Pros and cons of common stocks

Many investors prefer common stock because of its potential to earn long-term capital gains if the company is successful. But if the company does not perform well, common stocks are more vulnerable to financial losses.

Historically, bonds are less volatile than stocks.

Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.

Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.

Stocks offer ownership and dividends, volatile short-term but driven by long-term earnings growth. Bonds provide stable income, crucial for wealth protection, especially as financial goals approach, balancing diversified portfolios.

Why is investing in stocks so risky? ›

Stocks are much more variable (or volatile) because they depend on the performance of the company. Thus, they are much riskier than bonds. When you buy a stock, it is hard to estimate what return you will receive over time (if any). Nonetheless, the greater the risk, the greater the return.

Disadvantages of investing in stocks Stocks have some distinct disadvantages of which individual investors should be aware: Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies' policies, which individual investors do not influence.

Answer and Explanation:

A major disadvantage resulting from the use of bonds is that c) interest must be paid on a periodic basis. The additional expense of loan interest payments decreases the flexibility of the company in managing cash and can put a greater strain on a company's ability to stay solvent.

Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.

One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins. Your financial situation and investment style will determine if they're right for you.

The potential benefits of investing in stocks include: Potential capital gains from owning a stock that grows in value over time. Potential income from dividends paid by the company. Lower tax rates on long-term capital gains.