Skip to main content Skip to Login Skip to Find An Advisor Skip to footer

Investing in stocks and bonds

Stocks and bonds are often referenced together in investment planning discussions, but these two types of securities are quite different. 

Investing in stocks and bonds

The differences between stocks and bonds as investment options are why many strategists believe they make a good match. By blending stocks and bonds together using an asset allocation strategy, investors may be able to take advantage of markets that move up while also limiting losses when markets move down.  Here are answers to some common questions about stocks and bonds.

In this article: 

What are stocks? 

When you buy a share of stock, you are essentially buying an ownership stake in a company. Over time, share prices can increase as a company’s performance and profits increase. 

  • For example, if a certain company’s stock price is $100 per share, and you buy 10 shares, you’ve invested $1,000 in that company. In five years, if that stock price were to increase to $500 per share, your initial 10 shares have grown to be worth $5,000. Your profit is $4,000 or 400% of your initial investment.1 
  • While stocks have the potential to generate profit over time, you also run the risk of the share value declining if the company’s performance declines. For instance, if that same company’s stock price falls to only $40 per share over the course of those five years, you would have lost $600, or 60% of your initial investment.1

Many companies also share a portion of their revenues with shareholders by paying the shareholder a dividend. Dividends are not guaranteed and can vary over time but when received this adds to your return.

To help reduce risk, it’s generally a good idea to diversify your stock portfolio by investing in more than one company, industry, and kind of stock.

What are the different types of stocks?

There are many different kinds of stocks, including:

  • Growth stocks: Often in new or growing industries with the potential for earnings to increase at a faster rate than the market average
  • Value stocks: Value stocks come from companies with good earnings that are selling shares at lower prices relative to their value.
  • Income (or High Dividend) stocks: These usually pay steady dividends but historically have not experienced strong share price growth. This category was at one time dominated by energy, financial services and utilities, but more technology companies are now paying and growing dividends. 
  • Blue chip stocks: These are stocks of large and well-regarded companies with a strong growth history. They also often pay dividends.

Benefits of stocks

Risks of stocks

  • While no one can predict exactly how the markets will perform, when you invest in stocks you can invest in a growing industry or company and capitalize on the earnings over time. 
  • Historically, stocks see an average annual return of  10%2, though this fluctuates year over year and performance differs between companies and industries. In the long run, stocks may provide you with a greater return on investment than securities like bonds can offer.
  • Common stocks of major corporations are considered liquid investments. You can quickly and easily sell these investments as your financial goals change over time.
  • While investing in stocks can come with many rewards, there are also some risks. Several factors can affect the price of your shares and investors may lose a portion or all of their investment. Factors include: 
    • Recessions, inflation, unemployment rates or interest rate fluctuations. The state of the economy may prevent a corporation from achieving the profit levels it is seeking.
    • Political or social risk. Objection to the  nature of a particular company’s business or to how it conducts its business. Bad publicity could cause prices to decline. 
    • A shift in investor/consumer behavior
    • Changes in foreign exchange rates or diplomatic relations.
    • Competitor actions or poor managerial decisions may cause lower profitability or business losses.

Read our guide to risk tolerance and asset allocation and take the risk tolerance quiz.

Investing

6 key investment principles

Learn how to become a more successful investor with the time-tested investment strategies of dollar-cost averaging, asset allocation, diversification and more.

Read More

What are bonds?

When you buy bonds, you are loaning money to the bond issuer, which is typically a company or government agency. Unlike with stocks, you don’t obtain ownership stake in the company when you invest in bonds. Bonds have a maturity date when the loan is due to be paid in full, and they usually offer fixed or variable interest payments.

A general rule of thumb is bonds that have longer maturities offer the higher the interest rates because investors are taking on a greater risk. Similarly, higher-quality bonds generally offer lower interest rates because the investors’ risk is generally lower. Bonds also have varying levels of liquidity. 

What are the different types of bonds?

Here are some of the most common types of investment bonds available to investors:

  • Corporate bonds: These are issued by private corporations. The debt can be paid off by the company and redeemed by a fixed date, paying you back your principal and accrued interest. Or, in the case of callable bonds, the corporation can “call” or redeem the bond which allows them to pay off their bonds before the maturity date. Corporate bonds are typically categorized as either investment grade bonds or high-yield bonds. 
    • Investment grade bonds: Usually offer lower yields because they have lower interest rates and have higher credit ratings. 
    • High yield bonds:  Typically pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they must pay a higher yield than investment-grade bonds to compensate investors.
  • Municipal bonds: Municipal bonds are issued by states, counties or municipalities. They’re usually exempt from federal income tax and can also be exempt from state income tax under certain conditions. While these bonds tend to offer the lowest interest rates, their overall returns for investors can be higher due to their tax advantages.
  • Government bonds: Government bonds that are backed by the U.S. government, such as U.S. treasury notes, are typically considered a lower risk investment option. While the terms can vary from a few days to several years, the government guarantees the lender to be paid in a timely manner with interest. Interest earned is subject to federal income taxes, but not state or local taxes.

Benefits of investing in bonds

Risks of investing in bonds

  • Because bonds tend to have more stable returns than stocks, they can help to create a balanced portfolio with a healthy mix of assets. 
  • Some bond types are less dependent on market performance than stocks and can be a good option for investors who are more risk averse, including those who are about to retire or who have already retired.
  • The interest payments that an investor receives from bonds can lead to a steady stream of fixed income over the life of the loan.
  • While bonds tend to be a safer investment than stocks, they also come with potential risks, one of them being interest rate risk. Interest rates can have a significant effect on bond prices. When interest rates increase, bond prices generally decrease and vice versa. 
  • Another important risk is bond default. A bond default could result in loss of principal and/or interest if the borrower is unable to repay the loan. In general, default probability is low on investment grade bonds.

Mutual funds, index funds or exchange-traded funds

Investors can also use products like mutual funds, index funds, or exchange-traded funds (ETFs) to purchase stocks. 

With these investment options, an investor can purchase shares in a fund that has pooled together stocks, bonds, and other types of securities, instead of investing in one individual company or bond. This can be a valuable and convenient option for investors who want to diversify their holdings and have greater variety in their asset allocation. 

What is asset allocation?

Talk with an Ameriprise financial advisor today

Because the nature of investing in stocks and bonds involves risks, there’s no one way to guarantee financial security. An Ameriprise advisor understands how these risks can affect the market and your investments, and they will work with you to create a personalized investment portfolio based on your goals, time horizon and investment risk tolerance. 
 

An Ameriprise financial advisor can help you make informed decisions when it comes to investing in stocks and bonds.

Or, request an appointment online to speak with an advisor.

There's a sense of confidence that comes from feeling in control of your finances - and working with a financial advisor can help you get there. Please share your experience and tell your friends and family about me.

Background and qualification information is available at FINRA's BrokerCheck website.

1 This illustration is hypothetical and is not meant to represent any specific investment or imply any guaranteed rate of return.
2 The Reality of Investment Risk, FINRA.org, Web. <11.16.2020>. https://www.finra.org/investors/learn-to-invest/key-investing-concepts/reality-investment-risk.
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned.  The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor.  Please seek the advice of a financial advisor regarding your particular financial situation.
Past performance is not a guarantee of future results.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Asset allocation and diversification does not assure a profit or protect against loss.
Growth securities, at times, may not perform as well as value securities or the stock market in general and may be out of favor with investors.
Value securities may be unprofitable if the market fails to recognize their intrinsic worth or the portfolio manager misgauged that worth.
Non-investment-grade (high-yield or junk) securities present greater price volatility and more risk to principal and income than higher rated securities.
Income from tax-exempt municipal bonds or municipal bond funds may be subject to state and local taxes, and a portion of income may be subject to the federal and/or state alternative minimum tax for certain investors. Federal income tax rules will apply to any capital gains.  
ETFs may trade at a discount to NAV, are subject to tracking/correlation risk and shareholders bear additional ETF expenses.
Guarantee, as used in this material, depends upon the ability of the issuing entity to honor and pay the amount you may be entitled to. U.S. Government bonds are backed by the full faith and credit of the U.S. Government. It is possible that an issuing entity may not be financially able to meet income guarantee obligations.
Registered securities are sold by prospectus only. Investors should consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information and should be read carefully before investing.
Ameriprise Financial Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by, any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.