Do I invest in stocks or bonds?

Al Edwards, Acting Financial Editor

BEFORE setting out on this article I wanted to ascertain for myself whether people were au fait with the difference between stocks and bonds. The highlight of my little survey ­ "Look here man most man do know the difference preferred livestock to preferred stock" ­ That says it all really.

Despite the fact that stocks are volatile, historically, they have out-performed bonds over long periods of time.

To therefore shed some light on the matter a comparison of stocks to alternative investments in the bond markets should give the investor a clearer picture of the differences in the rates of return and the risks.

Bond investments offer less variability in returns than common stocks: 8.4 per cent for long-term corporate bonds versus 20.5 per cent for common stock tends to be the norm.

However, if there is a long investment period, the higher variability risks for common stocks can be averaged, resulting in higher returns for stocks.

Common stocks represent ownership in a corporation, where-as bonds are IOUs and bondholders are debt-holders, or creditors. Investors in common stocks are the owners of a corporation and are entitled to voting rights and a claim on income and assets. As to the latter, common stockholders stand last in line in their right to share in the income and assets.

Shareholders are entitled to receive dividends only after the bondholders and preferred stockholders have been paid. Similarly, in bankruptcy, the claims of bondholders are settled first, while common stockholders are last in line for the collection of any remaining proceeds from the liquidation of assets.

Investors in common stocks are not guaranteed dividends. Dividends on common stocks are declared at the discretion of company's board of directors. If the board decides to use the money for alternative purposes or if earnings go down, dividends may be reduced or may not be declared. By contrast, investors in

bonds can count on a steady stream of interest income. Thus, investors who cannot tolerate the reduced or terminated flows of current income should not buy common stock.

Investors are strongly attracted to common stocks for their ability to provide for capital growth over long periods of time. Bonds also offer the potential for capital appreciation (an increase in the selling price over the purchase price), but investors invest in bonds primarily for current income.

This comparison of some of the characteristics of stocks and bonds highlights the following reasons why investors should also consider investing some of their portfolios in bonds: