Generally, the more preferred modes of investments in India comprise of mutual funds, shares, bonds, fixed deposits and a variety of savings schemes – primary objectives of which include supplementing for your regular source of income and imbibing the earnest habit of saving on a routine basis.
Two of the more common investment avenues include shares and bonds. The rest of the article delves deep into the major points of differences between the two:
StocksInstitutions and companies seeking to raise capital – be it for managing operational expenses or building assets -- grant a part of their ownership (by way of issuing shares to the general public) in lieu of a particular monetary value.
Stated below are a few important features:
- These can only be issued by Public Listed companies that are already listed on the stock exchange.
- A mix of implicit and external factors determine the value of these shares. Some of the more common ones include future growth projections of the company, market dynamics and ongoing trends, demand and supply of stocks, prevalent political conditions, current tax regime of the government and the likes.
- Investors in the stock market are considered to be the respective company’s stakeholders and they can leverage their voting rights in order to influence internal voting decisions of the management.
- Profits that are distributed among the company’s shareholders would be in the form of dividends.
- Should the public company (that issued shares) come into losses, its shareholders would not be entitled to any dividend for the particular fiscal.
BondsA fixed-income instrument, bonds serve as loans for the issuing institution. The amount raised in the form of this debt-instrument can be used by the issuer to manage both current as well as long-term expenses.
- Generally, it is the private companies and government institutions that issue bonds
- Bondholders earn a regular interest income – decided at pre-set intervals - on their investments
- On maturity of the bond, it is the issuer’s responsibility to repay the total debt that was issued initially at the time of purchase.
- Some of the common bond types include tax-saving bonds, corporate and public undertaking bonds.
The table below captures the basic difference between both these financial instruments on various parameters:
|Profit on investments||Not fixed. Pay-outs to shareholders is mandatory only should the company book profits during the financial year||Involve a fixed-interest income|
|Returns earned are referred to as:||Dividends||Interest|
|Issued over/by||Stock exchange||Financial institutions Public Undertakings Both private and government institutions|
|Investor is the:||Shareholder||Lender|
|Risks involved||Generally high. This is because returns on investment are not guaranteed, considering market extremes are a regular feature of the stock market||Generally, low|
|Maturity period||Depends on the investor. Ideally, you should stay invested over the longer haul in order to reap increased inflation-adjusted returns||Already fixed at the time of purchase|
|Type of instrument||Equity||Debt|
Choose the one that best aligns with your financial goals, risk appetite and investment horizon.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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