Investors Must Understand 7 Differences between Stocks and Bonds

Stocks and bonds are two popular instruments to invest in for profit. There are many similarities between the two, starting from being able to be redeemed, in the form of a document contained in an agreement, to being able to be traded on the capital market.However, what about the difference between stocks and bonds?

 

The difference between Stocks and Bonds

As an investor, you must understand the differences between these two instruments so that you don’t make the wrong investment. Understand more about the difference between the two below.

1. Ownership of Unequal Rights

Although both are investing activities, owners of shares and bonds have different rights. Especially for shares, you as the owner have two rights, namely voting rights to participate in the GMS and also the right to company profits.

In this case, you can participate in making decisions at the general meeting with other shareholders. Of course, you also get an invitation for each meeting held.

What about bonds?

If you invest in bonds, you only have rights or status as a lender.

2. Imposed Taxes

Bonds become investment instruments that generate interest as a profit for the owner. Meanwhile, stocks generate dividends as a result.
Usually dividends are distributed over a certain period and the total amount will be tax deductible.

This is different from bonds where interest is given or issued as a fee. What does it mean? Bond interest as an expense is considered non-taxable.

3. Risk

Another thing that is the difference between these two instruments is the accompanying risks. Stock instruments have risks ranging from the company that houses the shares to being suspended, bankrupt, to delisting.

Specifically for these three risks, the capital you invest can be lost without a trace because there is a possibility of default. In addition, there is still a risk that you will not receive dividends because the company is losing money and also market fluctuations.

Meanwhile, bonds have 3 risks, namely default (especially for private companies), capital loss, and also liquidity.

4. Return or Profit

Stocks and bonds are actually two instruments targeting different types of investors. This difference is related to the rate of return that you can earn.

Stocks promise the potential for high risk returns and bonds have stable returns, but the numbers can be small.

Stock investment is more suitable for those of you who like challenges with big risks and potential returns, while bonds are more suitable for those of you who are beginners. The reason, bonds have a lighter risk than stocks. Profits are also divided each month with a fixed amount.

5. Validity Limit

The difference between stocks and bonds is further related to the validity period. Stocks usually have an uncertain validity period because everything depends on the existence of the company.

As long as you still have proof of share ownership and the company continues to operate, this means that ownership is still valid.
Unlike stocks, bonds have a definite expiry date and the limit is stated in the debentures. The potential profit that you will get also only revolves around the validity period of this instrument.

The difference in expiration dates also means that stocks and bonds have different market shares. Those of you who want to invest long term, are more suitable to choose stocks. But always remember, the risks and potential benefits of stocks are high and low.

Meanwhile, bonds are more suitable for those of you who want to invest for a certain period of time. After completing a bond contract, you can move to another instrument.

6. Additional Functions

Did you know that bonds can be used as collateral for a bank loan?
Apart from that, you can also use this type of debt as collateral if you want to buy shares on the IDX. This is clearly different from shares that are not indicated as letters that you can use as collateral.

7. Flexibility and Capital Gains

While you can sell bonds at any time, you can’t buy them at any time because there is a specific schedule that needs to be followed. Of course, selling bonds before maturity will affect the nominal you get.

Meanwhile, you can buy and sell shares at any time without being bound by time, you can even get capital gains, namely the difference between the buying price and the selling price. Of course, you should maximize capital gains by selling shares when the price is in good condition.

So, from the 7 differences between stocks and bonds above, now you can see which type of investment is more suitable for each profile, right? Do not just choose an investment instrument because the basis of this activity is to benefit from the capital you investm.