Why are stocks riskier than bonds?
Bonds are structured more like a loan to a business. With the typical bond issue, if you ignore the risk that the issuing company is going to go bankrupt, you know exactly how much money you will receive and when it will come. For example, you might receive a 6% yield, probably 3% every 6 months. If you hold it to maturity, you will receive the face value of the bond back, say $10000 in 20 or 30 years.
There is some risk that you will not be able to hold the bond to maturity. If that is the case, you can sell it on the open market, but if interest rates have gone up, you will receive less than face value of the bond in return. Of course, if interest rates have gone down, you could actually receive more than face value for your bond.
One other risk comes in with a "callable" bond. In this case, the issuing company has the right to redeem, or call, the bond before maturity. They may want to do this if interest rates were to fall, so they could reissue the bond and pay the lower interest rate.
But in general, stocks are riskier than bonds because bonds will have a fairly well know cash flow, while the stock will have anything but a certain cash flow. This is also why a stock has the potential to appreciate greatly in value.
But most people don't hold individual bonds in their investment portfolio. They are more likely to hold mutual funds, specifically bond funds. This is especially true in retirement portfolios like IRAs and 401ks. And bond funds behave quite a bit differently than individual bonds, so much so that the conventional wisdom that stocks are riskier than bonds may no longer hold true...
Learn more about stocks vs bonds at http://fundztrader.com We also have more information about choosing the best mutual funds as well.
Source: www.isnare.com
