What are bonds? Difference from shares

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

There are a lot of investment financial instruments with which you can get income from capital: mutual funds (mutual investment funds), IISs (individual investment accounts), PAMM accounts in which investors entrust funds to traders trading on Forex, stocks, futures contracts on stock exchanges, etc. In this article, we will talk in more detail about what bonds are. How are they different from other securities and how can you invest in them?

What are bonds

Bonds and bonds are the same thing. The first name is more modern, as it came to us from the West quite recently. The meaning of "Eurobonds" is often found, that is, securities that are quoted on an international exchange. The term "bonds" is usually applied to domestic sales, but this is not a postulate. For example, US government securities are called US government bonds. Therefore, these are equivalent concepts.

Bonds (bonds) is a security, which is a confirmation of the issuer's debt obligations to the investor. By buying them through stockbrokers, people are actually lending to companies, acting asfinancial institutions and banks. Of course, issuers provide various bonuses for this, depending on the stated conditions. To better understand what bonds are, let's move on to payment methods for them.

Types of bonds to settle with investors

Depending on how exactly the investor will receive income, bonds are divided into three main types:

• Discounted bonds assume that purchasers will receive the entire main bonus upon presenting for payment. The nominal value of securities is higher than the real value. To understand this better, imagine that one person bought 100 rubles for 115, but they will give them back to him only after a specified time. The exchange monitors the integrity of the entire operation.
• Coupon bonds involve fixed interest payments for a certain period of time to investors, which are called coupons. The par value of securities is usually the same as when they were sold. Coupons are the main source of income. Suppose that one person bought 100 rubles for the same amount, but they will give it back to him only after a year. The income consists in monthly payments of 5 rubles.

Bonds with a mini-coupon offer a mixed system of the above methods of return: a small percentage and a small difference in face value

Some people misunderstand that bonds are stocks. Actually it is not.

Difference from stocks

Shares are securities that en title their owners to receive profit from the enterprise. Such income is called dividends. The more successfulfirm, the higher the amount will be. In addition, the purchase of a share implies that the investor becomes a co-owner of the enterprise.

Bonds (bonds) are securities that offer a fixed guaranteed income. It does not matter how much the company has earned or lost while they were with the investor. In any case, the firm is obliged to pay upon presentation of the bonds.

It is wrong to think of bonds as a right to a certain share in an enterprise. Even if the investor buys securities much more than the entire authorized capital of the company, he will not become a co-owner.

Benefits

Hopefully, now it is clear what bonds (bonds) are. Now let's look at their main advantages:

• Assume a guaranteed income for investors. In fact, these are debt obligations that the issuing company takes on, so the securities are not affected by its current financial position.
• The return is higher than a regular bank deposit. Of course, in percentage terms, it is small - in the region of 10-12%, depending on the company. On bonds of the largest corporations and federal loan bonds, the yield is even lower, but their level of trust is such that it is possible to draw an equal sign between them and bank deposits.

Bonds can be sold on the stock market without losing your investment and income, unlike bank deposits, which have a significant reduction in the percentage of income for early withdrawal

Cons

You can't say that bond securities are an ideal investment tool. Investors, as a rule, invest in them in order to save money, not to increase. In crises and periods of instability, competent financiers do not invest in shares of companies whose stock quotes can “merge” all capital. They prefer to invest in the same firms, but in bonds, since the income from them will be guaranteed, unless, of course, they go bankrupt at all. The disadvantages of bonds include:

• Lower interest compared to other investment vehicles. But do not forget that the risks of losing them are also great.
• No opportunity for investors to co-found a company and make a profit.

Reason for release

We explained what bonds are. These are securities traded on stock exchanges. They represent debt. Companies resort to the practice of issuing for the following reasons:

• Urgently improve the current state of affairs: pay off loans, obligations, avoid fines, pen alties, etc.
• Purchase the necessary batch of goods at a bargain price.
• The company lacks funds for development, and bank loans will be more unprofitable than bonds
• Seasonal decline factors, etc.

If the state issues bonds, this does not mean that it is bankrupt, there is no need to shout "watch, everything is lost." As a rule, all governments resort to a source of loans on the stock exchange. The reasons may bemultiple:

• Government revenues come at a certain time: tax revenues, interstate tranches, license renewals, and operating expenses are continuous.
• Amounts are needed for serious investment projects that will bring much more profit than the cost of bonds.
• Fulfillment of other financial obligations, etc.