Investing basics: Stocks and bonds

CEBU, Philippines - Financial market investments are generally not easy to understand as people also try to indicate misconceptions on them.

So, most inexperienced investors end up putting their money in what they believe are most convenient and common -- the bank -- saying other forms ofinvestments are too risky.

However, aside from traditional banks, there are actually other places where individual investors can put their hard-earned money to gain returns later. For instance, stocks and bonds are two of the most general financial instruments that people often hear from those in the financial community.

Of course, the two differ. Each has its own system. But, what exactly is bond investing? And how does investing in stocks also work?

Bonds are debts

Bonds are considered as debts or the so-called IOU (I owe you), said Marco Nino Velasco, business development officer of UniCapital Securities, Inc.

Business firms and even governments issue bonds to finance their daily operations or particular projects. In an interview, Velasco explained to The FREEMAN that when a person buys a bond, he is loaning his money for a certain period of time to a certain company, also called the issuer.

As a return of investment, bond owners take back the loan amount plus the interest payments on the bond's maturity date or on a specific date of the issuer's choice. Bond's term is the length of time to maturity.

"Technically, a bond is just like a paper lang siya — like a contract," he noted. "The concept of this investment is that mo-issue og bonds ang company unyamopalit og bonds ang tawo."

Bonds are considered as fixed-income investments so their life span and interest costs are fixed and so the returns, Velasco emphasized.

While it is a fact that bonds are far more safer than stocks because of lower volatility, he noted that there is a possiblity that a company cannot pay back its bond holders.

Although corporate bonds pay more interest than government bonds, they though hold greater risk of default, an idea that suggests that bonds are definitely not "risk-free."

On the other hand, government bonds are considered the safest bond investments because of the assumption that government has always money to pay.

"Yes, the risk is low but remember: low risk, low regard and high risk, high reward," he noted on the degree of possible default on such investment.

The development officer described bond investors as "conservative" because they usually avoid greater risk to maintain capital preservation.

Stocks are more risky

Investing in the stock market is a little bit more risky than bonds mainly because of the volatility nature of the market. At its most basic level, stocks offer an ownership stake in a company. Issuing stocks is bringing partners into business.

Stock is the term referred to each company listed on the nation's stock exchange, the venue where companies can raise capital through selling of shares to potential investors. It is done through the Initial Public Offering.

"It really depends on your goal. If you are looking for growth -- fast growth -- you go for stocks," Velasco explained when asked about the type of investment to get.

He noted in stocks, one can possibly earn a 30 to 50 percent interest in a year but warned that an investor may also experience a negative results. In bonds, although the interest ranges only from 5 to 10 percent, the bond owner can be assured that it will never go down as it is called fixed-income investment.

The stock broker said, “Stocks is technically about ownerships. The ownership of a company dili na 100 percent kay naa na may part owners.”

The value of the company affects the value of stocks and so stock price varies depending on how the market rates the company. Velasco noted part owners have the right to know the status of the firm in the market whether it is doing well or not.

Generally, stocks have been considered solid investments despite the instability because when the economy grows, it significantly affects corporate earnings so too the stock prices.

In a short-term event, the market's behavior is traceable on the sentiments of the investors including their fear and enthusiasm. But corporate earnings generally determine whether the stock price will go up or down.

The most ideal equity (other term for stock) market capital investment is P10,000 but investors can still start even with just P5,000 or P1,000 -- only with very little share. 

Velasco said understanding these investments require utmost interest and the willingness to grow one's money than just allowing it to stay in his pocket or piggy bank. The lack of awareness and education on financial matters remains a challenge which should be addressed to promote money literacy to the people. (FREEMAN)