Stock Versus Bonds
Overall rating: (N/A)
The article "Stock Versus Bonds" is about finance, it was released by Hari Wibowo.
A lot of invesotrs may wonder if they should have invested in
stocks or bonds or both. Both invesmtent vehicles have their own
merit in the investment world.
However, the hottest investment
choice depends on your invesmtent horizon and your risk
tolerance.
Bond is a certificate of debt issued by governments or
corporations which will be repaid after at maturity.
Bond
investors get steday stream of interest while the principal will
be paid at maturity.
Currently, the ten year tresaury bond yield
4.48 %. This guarantees investors that held the bond to
maturity, an anunal 4.48 % return on investment assuming a
default risk of 0.
Since treasury bond is bakced by the United
States government, it is safe to say that the default risk is
nil.
Treasury bond cost fluctuates daily. But the potential
capital gain from the cost change is fairly mniimal. As of
Tuesday December 6th 2005, the 10 year treausry bond is priced
at around par value of $ 100. Therefore, the investors' main
return on investment is through the interest payment of the bond.
When investing in common stock, investors may be rewarded with
either dividend payment or capital appreciaiton or both. Mainly,
investors are aiming for capital appreciation profit when they
invest in stokcs. Historically, stock market indices has
returned 10.5% for world war II.
Stock investors may be
exposed to a lot of risk due to the cost vloatility. When the
company is doing poorly, investors may lose half or all of his
principal. Bond investors do not have that problem if the debt
issuer still survives.
In my opinion, investors are well served investing in sotcks if
they will not use the savings for more than five years. The
reason is simple. Common stock gives a much larger rteurn than
bond.
Investing in bond meerly get you even with inflation. Some
common stock can even give you that kind of return from dividend
alone.
If stock investors propelry calculated the fair value of
the common stock, the short-term volatility of stock will not
matter. In the long run, stock will be traded close to their
fair value.
There is no need for investors with five year investing horizon
to avoid common stocks.
Whlie investing in treasury bond is
theoretically safe, its return barely match inflation.
In other
words, investing in treasury bond will not make us richer.
|
Write a comment about the article
Stock Versus Bonds
|
