Fundamental Differences Between Stocks And Bonds

As a novice in the world of investments, it is important to know the basic differences between stocks and bonds. Stocks provide partial ownership in a corporation, while bonds are loans from an individual to a company or government.

One of the biggest differences between these two is how they generate profit. Stocks must appreciate in value and be sold later on. On the other hand, bonds pay fixed interest over time. Continue reading this article to know other notable differences between stocks and bonds.

STOCK MARKET VERSUS BOND MARKET

A place where investors can trade equity securities such as common stocks is called the stock market. Buying stocks (i.e., equity securities) entails that you are buying a very small ownership stake in a company. Equity holders purchase stocks in a company on a belief that it will perform well and that the value of the shares they purchased will increase. These stocks are traded on stock exchanges.

The key function of the stock market is to bring sellers and buyers together into a regulated, fair, and controlled environment where they can execute their trades. This regulated environment not only helps the investors, but also the corporations whose equity securities are being traded. The economy thrives when the stock market remains its robustness.

Let us move on to the bond market. The bond market is where investors go to trade debt securities (e.g., bonds), which may be issued by the governments or the corporations. The bond market is also known as the credit or debt market. Buying a bond or a debt security entails that you are lending money for a period of time and charging interest. You can compare the process to how banks charge interests to its debtors.

The key function of the bond market is to provide its investors with a steady, albeit nominal, source of regular income. In some cases, investors receive bi-annual interest payments. Many investors choose to hold bonds in their portfolios to save money for long-term needs such as retirement and their child’s education.

WHERE STOCKS AND BONDS ARE TRADED

Stocks are traded on exchanges, which are places where buyers and sellers decide on a price. Some exchanges are carried out on a trading floor or other physical locations. While, other exchanges are carried out virtually and are composed of a network of computers.

In contrast, the bond market does not have a centralized location to trade. Bonds mainly sell over the counter. As such, individual investors do not usually participate in the bond market. Those who participate include large institutional investors like pension funds foundations, asset management firms, and investment banks. Individual investors who wish to invest in bonds do so through a bond fund managed by the asset manager.

RISKS OF STOCKS VERSUS RISKS OF BONDS

Investors of stocks may be exposed to risks such as currency risk, liquidity risk, interest rate risk, and geopolitical risk. Moreover, stocks run the risk that the company could perform poorly or fall into bankruptcy and disappear altogether.

When it comes to bonds, investors are more susceptible to risks such as interest rates and inflation. When the interest rates are high and you need to sell the bond before it matures, you may end up getting less than what you paid for. If you are purchasing a bond from a company that is not financially sound, you are embracing the risks of credit. The bond issuer may not be able to make the interest payments, leaving itself open to default.

BOTTOMLINE

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Many people opt to invest in both stocks and bonds to diversify. The appropriate mixture of stocks and bonds in your portfolio must consider your tolerance for risks, personal timeline, and investment objectives. Typically, stocks and bonds do not fluctuate at the same time. Think about that.

Sources: 1 & 2

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Invest Your SRS with MoneyOwl And Get Up To $200 Shopping Vouchers

The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement. Unlike the Central Provident Fund (CPF), it is not compulsory to participate in the SRS scheme. A key benefit of SRS is that members can enjoy dollar for dollar tax relief, capped at $15,300 per annum for Singaporeans while saving towards their retirement goals. As a tax deferral scheme, when you subsequently withdraw from your SRS after the statutory retirement age, only 50% of the amounts withdrawn will be subject to tax. Individuals who would like to open an SRS account can do so with either DBS, UOB or OCBC bank.

Don’t leave your funds in SRS un-utilised

After transferring funds into your SRS account, don’t leave it un-utilised! According to Ministry of Finance (2019), over 28% of SRS contributions sit idle as cash balances, earning a low interest rate return of only 0.05% p.a.

There are many ways that you can utilitse your SRS contributions to grow your retirement funds, such as investing in unit trusts, ETFs, stocks, bonds (including Singapore Saving Bonds and Singapore Government Securities) and single premium insurance.  A particular affordable and convenient way is to invest your SRS funds with MoneyOwl to boost your future retirement fund. Here’s why you should do so.

Invest your SRS with MoneyOwl

Investing your SRS funds with MoneyOwl starts from as little as S$50/month or $100 as a lump sum. This means that it is possible to start early without waiting for your SRS funds to accumulate to a substantial level. Besides, there is no platform fee so that more wealth is generated for the you in the long run. With MoneyOwl, you gain access to a globally diversified portfolio of companies with good growth potential at value prices.

Receive up to $200 eCapita shopping vouchers

MoneyOwl is offering a limited time SRS promotion valid till 31 Dec 2020*

Tiers Qualifying Conditions* eCapita voucher
1 S$1,000 to S$10,000 fresh funds invested OR; $50
2 S$10,001 to S$50,000 fresh funds invested OR; $100
3 S$50,001 and above fresh funds invested $200

More details can be found on MoneyOwl’s website

*T&C:

  • This promotion is only valid from 9 November to 31 December 2020.
  • This promotion is only open to the first 500 people who successfully invest their SRS funds with MoneyOwl.
  • Promotion is valid for one-time top ups using SRS funds only. Regular savings plans/ monthly SRS investments are not eligible.
  • Promotion is not valid for cash investments and investments in WiseSaver portfolio.
  • You need to stay invested and not withdraw your funds for at least 2 months after the promotion period is over (i.e. till end-February 2021). Vouchers will be sent to you in March 2021.
  • Only new MoneyOwl clients are eligible for S$50 voucher redemptions.
  • Both existing and new MoneyOwl clients are eligible for the $100 or $200 voucher redemption.
  • MoneyOwl reserves the right to change these terms and conditions from time to time.

About MoneyOwl

MoneyOwl empowers and fulfils lives by helping people make wise decisions to achieve their financial goals. With one of the lowest fees in the market, invest your SRS funds with MoneyOwl today to boost your future retirement income.

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What are investment bonds?

Simply put, bonds are a type of fixed-income investment that results in an investor lending money to the bond issuer in exchange for interest payments. The cash you inject into these funds will be invested in a variety of assets, for example property or shares.

You will received steady interest income with a potentially higher yield compared to the interest from a savings account.

However, the amount you get back isn’t guaranteed and depends on how successful (or not) the investments have been. The value of your investment can fluctuate greatly – you may either see a huge return on investment or you may lose money. This means there is a financial risk involved as there is a possibility you’ll get back less than you invested in the first place.

How do they work?

If you want to invest in bonds, you will require a lump sum – and some bonds require a minimum cash amount. Most people that invest in bonds will use a qualified professional or investment company who will explain the different funds available for you to invest in. As explained above, there is usually no minimum term length, so a lump sum will be paid to you either on death or when you request to withdraw money from your bond. It’s worth noting that if you wish to withdraw early on, you may have to pay a penalty charge.

What are the pros and cons of buying bonds?

Here are just a few of the pros and cons of investment bonds.

Pros

  • You may see the money you invested grow, meaning you get back more than you put in
  • Certain investment bonds have conditions that you won’t get back less than you invested
  • As bonds are a type of life insurance, certain policies may pay out a lump sum higher than the value of the bond if you die
  • Usually, you can withdraw cash from your bond each year up to a set limit
  • They can be an effective way to save long-term

Cons

  • The value of your investment may go down, meaning you get back less than you put in
  • You may face penalty charges if you want to withdraw money early on
  • This means your money will be tied up for several years
  • You may also have to pay charges when setting up the bond

There are many other pros and cons associated with investment bonds. Fully understanding the associated risks before investing is essential – as bonds are not suitable for all investors. It’s important to seek advice from a financial professional before making any type of investment.

 

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Receive a fixed interest of 3.03% per annum with Singapore Airlines's Retail Bond 2019

SIA RETAIL BOND 2019

Application from 20 March 2019, 9am, to 26 March 2019, 12pm

The SIA Retail Bonds (the “Bonds”) are interest-bearing debt securities issued by Singapore Airlines Limited. Investors will receive a fixed interest of 3.03% per annum, semi-annually on 28 March and 28 September of each year until the maturity date of the Bonds.

Up to S$300,000,000 will be offered to the public in Singapore (“Public Offer”).

Funds from the Bonds will be used for aircraft purchases and aircraft-related payments.

HOW TO APPLY (for Public Offer)

Application period
The Bonds under the Public Offer will be open for application from 9.00am on 20 March 2019 and close on 26 March 2019, 12.00pm.For DBS and OCBC, applications can be submitted 24/7. For UOB, applications (both ATM and ibanking) can only be submitted between 6am to 9.30pm, daily.Where to apply

  1. ATMs of DBS (including POSB), OCBC and UOB (together the “Participating Banks”)
  2. Internet banking websites of the Participating Banks
  3. Mobile banking application of DBS (including POSB)

Denominations

The minimum amount is S$1,000 and in multiples of S$1,000 thereof.
Application fee
A non-refundable fee of $2 will be deducted from your bank account at point of each application.Only one application is allowed for one person under the Public Offer. Multiple applications will be rejected.
CDP account
You will need to maintain an individual Central Depository (CDP) securities account and link it to your bank account with direct crediting service (DCS).

Prospective investors who wish to open a Securities Account with CDP directly must submit their application via post to CDP’s office at 11 North Buona Vista Drive #06-07, The Metropolis Tower 2, Singapore 138589. Alternatively, prospective investors may submit their application personally at CDP’s service centre at 11 North Buona Vista Drive #01-19/20, The Metropolis Tower 2, Singapore 138589. The processing time for the application of a new CDP account with direct crediting service will take about three business days. Prospective investors who submit applications after 12.00pm on 21 March 2019 should note that they will not receive their CDP account number in time to submit any application for the Public Offer Bonds. This deadline may change if there is any change to the expected timetable of key events set out in the Pricing Supplement.

The application form for the opening of a CDP account and further details can be obtained from CDP’s website at https://www2.sgx.com/securities/retail-investor. Prospective investors can also call CDP’s hotline at +65 6535 7511 on Mondays to Fridays from 8.30am to 5.00pm and on Saturdays from 8.30am to 12.00pm.

Click here for more details and FAQs.

All investments come with risks, including the risk that the investor may lose all or part of his/her investments. This includes investments in bonds. Bond investors face key risks such as default, interest rate, liquidity and inflation risks. A bond issuer may default and fail to pay the interest due, or repay the principal sum at maturity. Market prices of a bond may rise or fall. If you sell your bond at any time, you may suffer a partial loss of your principal sum if the market price is below your purchase price. Investors are responsible for their own investment decisions and they should read the Information Memorandum, the Pricing Supplement and the Product Highlights Sheet and seek financial or other professional advice before investing in the bonds. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

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Must-Read: Important Investment Questions Answered

WHY IS RISK TOLERANCE A FACTOR TO INVESTMENT?

Determining your preferences is the initial step to investing. Under it is risk tolerance. Risk tolerance is basically how much you are willing to gamble in any event. It can impact how you shape your portfolio. You see, the pressing need to acquire the money can make you shift towards conservative investments.

If you are worried that you are missing out on a higher earning potential, then your investments may be too conservative. On the other hand, constantly fearing the condition of your investments can mean that you are carrying too much risks. This is why you must quantify your risk tolerance by taking quizzes.

As I entered the investment scene under a renowned international institution, I was given a risk tolerance questionnaire with 16 questions. It helped me to identify the appropriate asset classes that suited my mindset.

CAN YOU RISK IT ALL BY PICKING YOUR OWN STOCKS?

I have to admit that becoming the mastermind of your portfolio sounds attractive. However, picking your own stocks can potentially become a disaster for newbie investors. Studies have shown that choosing your own stocks is almost always a losing proposition even for the professional traders. The risk versus the rewards of owning stocks are simply not in your favor.

Image Credits: pixabay.com

Why is this so? For starters, you are more likely to incur trading fees when you trade more stocks. This will eat any money you would make. Accept that you do not own a crystal ball. You cannot perfectly select the stellar companies over the dull ones. So, seek professional help whenever possible.

WHAT IS A BOND?

Whenever I give a talk about financial indepence, I always get asked about the different asset classes. Bonds is among the common ones. A bond is a fixed income investment in which an issuer or investor loans money to an entity. Entities such as companies or governments borrow the funds for a definite period of time, involving an interest rate. These bonds are used by said entities to raise money or finance a variety of projects.

For instance, an airline might take up a bond loan from the government if wants to purchase a variety of new planes. This type of loan involves a specific period and fixed investment rate. Said rate is determined by a number of factors such as the economy’s climate.

If you are comfortable with getting less money in return, then you will benefit from investing on bonds. You may think that bonds are less risky than others. However, this statement is not entirely true. Bonds are usually less risky than stocks when you are comparing products from the same issuing company. Institutions that offer bonds include Singapore Government Securities and ABF Singapore Bond Fund.

WHY IS IT CRUCIAL TO BE DIVERSIFIED?

By definition, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. Say that you invested all your money on one company. Your money will go down the drain when it goes bankrupt. Owning 2,000 shares from various companies can cushion the bankruptcy of two or more companies. It is essentially better to invest small pieces of wealth in multiple companies rather than investing it all in one.

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Simply put, diversification means that you will not put all your eggs in one investment basket. Being diversified applies to all the industries or asset classes that you will invest in. Try to invest a mix of stocks and bonds or a mix of industrial sectors. The broader your portfolio is, the more likely you are to weather a market storm.

Sources: 1 & 2

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