Question

The differences in risk/reward of owning equity (stock) vs debt (bonds) (What is your maximum upside and downside of each, and in what cases would you reach that?)

Answer 1

The risk of owning a stock is that the price of the stock can fall and can even go down as far as till 0. So, the investors are exposed to the risk of losing all of their money.

The rewards of owning the stocks is that the price can rise up till infinity and the stock investor can also enjoy dividends on the stock. If the investors are risk loving , then they can invest in stocks and enjoy unlimited gains.

The reward of owing a debt is that, debt is more secure and enjoys priority over equity in times of payments.They provide stable returns and are great for investors who are risk averse as there exist a fixed payment schedule in bonds.

The risk of debt is that the payment structure of debt is fixed and the returns can be lower at the times of inflation due to the fixed amounts of payments received. There is no guarantee that the issuer will make all the monthly payments as guaranteed.There is a possibility of default if the issuer is not the Government. In that case, the investor can lose their money as well.