The Methodology for Selecting Stock Investing and Bond Investing

When you are there looking to buy stocks or bonds you know that the right time to do this is dictated by the interest rates. While not being certain which the right element is to invest into, we have thought of describing you a parallel between stock investing and bond investing considering the factor of risk involved in this selection and its outcome.

Without any doubt, the risk of investing in stock is generally controlled by the status of a company that sells the stocks. For this fact, when a company is on the verge of bankruptcy, as a stock holder you will be the last one to receive payment for those securities that have failed into begun profitable.

This is the best case scenario, because otherwise you are more likely to lose all the invested money once the company goes bankrupt. There will be the liquidation process indeed and only when equity remains, this one is divided as follows: first the loans, then the bonds, following the preferred stocks and lastly the common stocks.

With a company that is highly leveraged, there are increased chances to go bankrupt and the most part of the equity that remains is returned for bank loans along with bond holders. But more often than not, these bond holders will lose money than recuperating any of it. So if you want to buy stocks you should know where your money goes to, therefore you should be confident in that particular company.

Just think of this problem from another perspective: it is easier for one person for instance to increase their wealth when staying away from debt. The same should be seen when it comes to owning a stock within a company. This one can become profitable so long as the company avoids going deeply into debt.

Now talking about bonds you should see the things from this perspective: going to the bank in order to purchase a home for you there will be a different interest rate applied to your loan than it has been set for another borrower. Why? Because each client/borrower is seen in accordance to the risk they represent for the lender.

The same goes for the bonds, when companies release these bonds they confront with the same issue from their investors. If the business is poor and there are difficulties foreseen for the near future, then bond holders will require a higher return for the money they have invested. But how much this return will be for the investor to account at the same time for the risk?

Well, if it were for the stocks the returns would be related to the company's potential into growing, but with the bonds the main concern of investors would be that the company is able to repay the debts. The issue here is for the business to continue its activity so long as the products are successful on the market.