Actions And bonds there are two types of financial instruments which can be bought or sold in the financial markets (primary and secondary) and, in particular, in Bag. For simplicity we can imagine the stock exchange as a large market where many different financial instruments are bought and sold, which we can compare to different types of fruit, whose prices fluctuate every day depending on many factors (availability, seasonality and others). In the same way companies on the stock exchange, selling the shares of their companies (actions) or asking for loans (bonds), they can raise funds to grow and/or finance themselves; for their part, investors, over the years, will benefit or not from the return opportunities offered by this market.
What are shares and how do they work
Going into a little more detail, when we talk about actions, we are referring to ownership shares in a company. The possibility for a company to be listed on the stock exchange brings various benefits related to visibility and to credibility (from now on everyone knows it internationally) and allows it to finance its growth because, since people buy shares in it, it will have more money to expand and develop. Obviously the process that allows a company to enter the market and therefore be able to sell its shares is detailed and complex.
In short, if you buy shares of a company, you become small co-owners of the latter depending on the quantity of shares purchased. If the company grows and makes money, the value of the shares can also increase and you can even receive an amount (so-called dividends) which is given by the company to its shareholders as remuneration for the money invested. However, the value of the shares can also decline or even disappear if the company goes bankrupt, so there is some risk in investing.
What are bonds
The bondsInstead, they are like gods loans: If you buy a bond, you become a creditorthat is, you are lending money to a entitysuch as a government (government bonds), to aagency (corporate bonds) or to a supranational body (supranational bond). In exchange, you receive some interests (coupons) at predefined intervals and, upon maturity of the bonds, the reimbursement of capital which was invested initially. Bonds are generally considered safer of actions, but they give gods more modest returnsalthough they still have gods risks linked to the issuer (think of the bankruptcies of some countries, such as Argentina, or even of companies). However, if a company goes bankrupt, in the liquidation process the money will be returned to those who own bonds earlier than to those who own shares, and this makes them a little safer.
How the value of stocks and bonds changes
Bonds and shares are the basis of the construction of a investment portfolio and can be purchased at any time at the market price. But What causes the values of individual stocks and bonds to fluctuate?
For them actionsdepends on several factors: the requested quantities on the market, i results that companies produce, the type of news that come out with respect to their trend. If many people want to buy a stock, the price goes up. If many want to sell it, the price drops. In the case of stocks, this growth is linked to how well investors believe the company is doing. Furthermore, if a company posts good results (profits), its share price tends to rise. Conversely, if the company has problems or losses, the stock price may fall. Finally, external factors, such as economic news, political events, or changes in the market, can affect the value of stocks.
For them bondsthe performance is linked to two main factors: the interest rate and the issuer risk.
Let’s start from the first: we must imagine the obligation as a agreement at a precise moment between the person who issues it (whether an organization or company) and the person who buys it: “you lend me 100 euros and I, in a certain number of years, promise you that I will give you your money back with a percentage of interest that I will pay you every year “. For example, when we hear that the ECB raised interest rates means that the new European bonds issued, i new agreementsthey will offer a higher recognized interest rate (for those 100 euros lent a higher percentage of interest will be given to whoever takes care of it in the same years), and therefore if I owned an old bond and wanted to resell it on the stock market, I could do it but at a lower value (we say at a “below par” value), because since the old agreement is less profitable, people will be more attracted to buying a bond linked to the new agreement.
We therefore come to the second factor that affects the value of bonds: the issuer risk. If the company or government that issued the bond shows signs that it may not be able to repay its debt to the creditor because it is not in a good economic situation (this is, in fact, the issuer’s risk), the value of the bond on the market goes down; if instead it seems stable, the value remains higher. Added to this is the effect ofinflationwhich could affect the value of the money we will receive back at maturity: that money lent, when it is returned, could have a lower purchasing power because it has in the meantime lost value due to the increase in the cost of living.
Is it better to invest in stocks or bonds?
So is it better to invest in stocks or bonds? It depends on many factors and therefore there is no exact answer.
We can say, however, that the value of a single title it is linked to the situation of a single company (or entity) and therefore having shares or bonds of only one type is very risky. The risk could reduce diversifyingthat is, investing in shares and/or bonds that are different from each other, for example from different product sectors or from various countries or contained within a broader “context”. In fact, there are many financial instruments, such as mutual investment fundswhich contain many shares or bonds within them and which, being diversified, could reduce part of the risk. These funds rely on sector specialists for the choice of stocks or bonds to contain, but this is a topic that deserves further investigation in a specific article.
In conclusion, we point out that both financial instruments, shares and bonds, must be used with care and competenceto avoid the possibility of losing part of your money, and also through certified channels to avoid any type of scam.
