Question

Discuss the difference between stocks and bonds as investments for an individual. What benefits does the investor receive from each type of security? What risks are associated with each type of security? How do preferred stocks differ from common stocks? Where can an investor find and read stock and bond quotes? How are bonds priced? What is the relationship between bonds and interest rates?

Answer 1

Stocks pay dividends however the dividends may not be paid if the firm chooses to do so. Historically, stocks come with a higher return and a higher risk. Bonds on the other hand pay coupons (except for zero coupon bonds). They have a lower total expected return than stocks but are also less risky. For stocks usually the return is from capital gains while for bonds usually the return is from coupons paid. Stocks can have highly volatile prices and returns shall be also volatile. For bonds, volatility is less.

Preferred stocks differ from common stocks as they pay equal perpetual dividends. They have to be paid before the common stock holders receive any dividends. The common stock holder may not be paid dividends if the firm chooses so.

The stock quotes are available on stock exchange while bond quotes are also available on exchanges or other financial websites such as Bloomberg etc.

Bonds are priced by discounting the future cash flows at given rate given the amount of risk. Higher the rates lower is the bond value.