When you want to invest, make sure you choose the right one. In investing, there are two types of investments that are quite popular, but the differences are still unknown. These two types of investments are stocks and bonds. Many people or novice investors do not understand the difference between stocks and bonds. In general, stocks and bonds have the same goal, namely to invest capital or funds to get profits from the company.
Before discussing the differences between stocks and bonds further, you must first understand the definition and differences between stocks and bonds in general. Stocks are a form of individual ownership of a company's assets which are usually in the form of documents. Stockholders are entitled to the profits obtained by the company according to the number of lots of shares they own. The profit in this stock investment is called a dividend.
Meanwhile, the difference between stocks and bonds is that bonds are debt securities issued by companies or governments, complete with interest and information on payment due dates. This letter is proof of a loan agreement, as well as the amount of interest that must be paid by the recipient of the bonds. Although companies can issue bonds, bonds are more often issued by government agencies.
What Are Stocks and Bonds?
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| Bonds vs Stocks |
Stocks and bonds are two investment instruments in the form of securities issued by companies or governments. In more detail, stocks are proof of a person's ownership of a company. As an illustration, if you invest in stocks, it means you have part of the ownership rights of the company. Because you have bought it, you are entitled to receive profits (dividends) and growth in the value of the shares (capital gain).
To be clearer, if you buy shares in Telkom, it means you become a mini "owner" who will also enjoy the results of this company's success.
Meanwhile, bonds are debt instruments issued by companies or governments. This means that if you buy bonds, you are lending your money to the issuer. You can also get the principal and interest returned within a certain period of time.
For example, you buy Government Securities (SUN), which are bonds from the Indonesian government to finance the APBN deficit. Well, in return, you will get interest or coupons that are paid regularly and the principal value of the debt is returned when it matures later.
What are the similarities between bonds and stocks?
Before we discuss the differences between stocks and bonds, let's first discuss the similarities between stocks and bonds.
1. Have a claim on profits and assets
Owners of stocks and bonds have a claim on profits and assets. Both of these investment instruments promise their owners income in the form of assets, namely money and other assets. The claim occurs on the transaction date or when purchasing shares and signing bonds which can then be executed when they mature. In essence, stocks and bonds promise income for their owners.
2. Have redemption rights
Owners of shares and bonds also have redemption rights, namely the option to exchange their shares and bonds for money.
3. Valuable securities
In this case, owners of shares and bonds have securities. Both are forms of black and white agreements in the form of agreements and have been approved by both parties. Later, these securities can both be traded on the stock exchange or capital market.
The difference between stocks and bonds is very clear in the form of profits obtained. If you want to play it safer, then choose a bond investment instrument. However, you should also know that bonds have 2 types, namely:
- The first is, secured bonds, which are types of bonds that are guaranteed by certain collateral. This type of bond is in the form of guaranteed bonds, mortgage bonds, collateral bonds and equipment bonds.
- The second is, unsecured bonds, which are forms of bonds that are given only in the form of trust, such as debenture bonds, which are bonds issued by the government and subordinate bonds.
What are the differences between stocks and bonds?
Meanwhile, there are several differences between stocks and bonds that you should know. Here are the differences between stocks and bonds:
1. Expiration Date
The first difference between stocks and bonds is the expiration date. Stocks and bonds have different expiration dates. Stock owners still have the right to profits and votes as long as the company is established and stock owners still have proof of ownership of their shares. While the difference between stocks and bonds is that bonds have a clear expiration date stated in the letter.
So stocks are the right choice if you want to invest in the long term. However, you must remember that stocks are also high risk high return investments, namely, stocks can generate a lot of profit but also have high risks.
The difference between stocks and bonds, on the other hand, bonds have their own advantages because of the predetermined time period. Because you can move to other investments if the agreement period has expired. So, if the company experiences a loss but the agreement period has expired, you are not involved in anything anymore.
2. Profit Level
Another difference between stocks and bonds is the level of profit obtained. Profits from investments are fluctuating, meaning they cannot be predicted and can change at any time depending on the company's profits.
Unlike bonds, the difference between stocks and bonds is that profits and bond ownership can usually be obtained every month with a stable amount until the validity period of the agreement ends. If you like and dare to take risks, stocks may be the right choice. However, if you want to get stable results, bonds are a safe choice.
3. Certainty of Return
Stocks do not have a maturity date. This means you can keep them as long as you want, as long as the company still exists. Dividend payments also vary from company to company, twice a year, or even every month.
In contrast, bonds have a definite maturity, for example stopping in 5 or 10 years. After that, your principal will be paid along with the interest.
4. Changes in Value
Stock values can rise or fall drastically, even every day, depending on market conditions and company performance. On the other hand, the value of bonds is relatively stable, unless market interest rates change significantly.
5. Taxes Imposed
The third difference between stocks and bonds is the taxes imposed. As explained above, the results received from stocks are dividends or profits from the stocks you own are the total amount after tax. On the other hand, the difference between stocks and bonds is that bond interest is first issued as an expense, so it can be considered non-taxable.
If you already understand the technical differences between stocks and bonds, you also need to know the differences between stocks and bonds in terms of risk. For bonds, you must understand some of the risks such as:
- Risk of Default - Poor cash flow can cause a company to default on bonds that have matured. This risk is high in private companies. Because buying government bonds is guaranteed by the state that it will always be returned using the state budget.
- Capital Loss Risk - Capital loss is a moment when investors lose because the price of bonds is priced lower than the price when buying. Changes in interest rates, political and economic issues, global problems and domestic unrest cause capital loss events.
- Liquidity Risk - Bonds are quite difficult to resell in a short time. Bond investments are considered not liquid enough. If forced to resell bonds before maturity. Then the investor will experience a loss.
While the risks of stock investment are:
- Not Receiving Dividends - Dividends are the company's profit sharing to investors. However, if the company experiences a loss, the investor will not receive dividends.
- Suspend - The company is suspended either temporarily or permanently by the IDX and OJK for cheating such as raising stock prices in a fictitious manner. This is considered unsportsmanlike and violates regulations in the capital market.
- Delisting - Similar to suspend, but the risk of a company being delisted is that it is no longer allowed to play in the capital market. IDX does not want to sell the company's shares, because it always loses and has many negative scandals surrounding the company.
- Bankrupt Company - If the company you invest in suddenly goes bankrupt, it will result in default. If there is a default, it is certain that your investment funds will also be lost.
- Market Fluctuations - Stock prices are highly dependent on market sentiment. So that stock prices continue to change according to the situation. This fact can be a risk but can also be called an opportunity. Still remember the explanation about buying stocks when conditions are weak.
If you already understand the difference between stocks and bonds and the risks of bonds. You should also understand who can invest in bonds. In the primary market (specifically ORI, Retail Savings Bonds, Savings Sukuk and Retail State Sukuk): individual investors (individuals) Indonesian citizens who are accompanied by a valid ID card. While in the secondary market:
- Individual investors (individuals) Indonesian citizens as evidenced by a valid ID card.
- Companies operating in Indonesia
- Foreign citizens who have KITAS except US citizens.
Conclusion
The conclusion of the difference between stocks and bonds is that stockholders have the right to company profits and also voting rights. Meanwhile, with bonds, the owner only has the status of a lender.
Understanding the difference between stocks and bonds is the first step to becoming a smart investor. Stocks are suitable for those who dare to take risks for the potential of big profits, while bonds are suitable for those who seek stability with a fixed income. Remember, the main key is to adjust investments to financial goals, risk profiles, and time horizons.
