We’ve all heard the classic financial education advice from investors and finance specialists: “Make your money work for you”. Basically, they recommend us not to keep all our money in the bank, but rather invest them in multiple ways. It's true, we get interest if we open a bank deposit, but invested, money can bring back even more value. However, we should be 100% informed before we invest in anything and keep in mind that the worst scenario is to keep our money under the mattress, not in the bank. As a reminder, all sources of income have their own risks and the following article is not investment advice. So, what could you invest in as a teenager? One opportunity is the stock market, by buying shares and bonds.
Shares and bonds are both types of investment securities, but they behave differently. Briefly, buying shares means buying a small percentage of a company, while buying bonds means lending money to a company. It may be a bit confusing in which to invest because a state company can issue both shares and bonds, but we are here to clarify the terms.
Shares are issued by companies on the stock market in order to get funds. When a company issues shares, it is selling an amount of its ownership. By purchasing shares in a company, you receive a title by which you have a claim to the company’s earnings and assets. After the acquisition, if the company has profits, you may receive a percentage of the profits from them in the form of dividends or you may be able to sell the share at a higher price. However, dividends and an increment in the value of the stock are never certain and there is also the risk of bankruptcy, in which case you lose both the amount invested and the dividends.
Bonds are issued by companies or states and, basically, represent loans. By buying a bond, you are lending money to a company for a pre-agreed period of time, becoming a creditor. Of course, you receive the money back on a fixed date and regular interest payments. The risk is minimal, the interest being insured. Moreover, state bonds are considered rock-solid by most people. However, any increase in the company’s profits doesn’t bring you added value.
You may ask me what are the advantages or disadvantages of bonds or shares. Let’s start with shares. They have the potential to generate higher returns than bonds. If the company experiences a period of growth or high profitability, your dividends will increase as well. Or you can choose to sell the share on the exchange market and receive more than you have invested. However, shares are riskier than bonds, with no predictability of returns. Shares can be sensitive to a lot of macroeconomic and microeconomic factors. Their value is affected by geopolitics, natural changes, or the overall market. So, you can benefit significantly if the company performs well or receive nothing if the company performs poorly.
Fixed-rate bonds provide known outcome and income at fixed dates. You are protected from huge downward fluctuations, but miss out on the important dividends that shares can provide. Shares outperform bonds in the long run, but bonds outperform stocks at certain times in the economic cycle. So, because bonds are predictable, they are a desirable asset for a portfolio. Another advantage of bonds is related to the capital hierarchy. Bond investors will get paid back before share investors in the case of an incident.
To sum up, both shares and bonds are good ways to invest, but it’s subjective which is better. Shares can be very profitable, but you also risk losing your money. Bonds are less risky, but offer less profit. It depends also on how much time you want to allocate looking for your investment. If you analyze different aspects from the market constantly, you can buy and sell shares at the right moments.
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