Bonds vs. Shares: Which Investment Is Right for You?

Within the realm of investments, there are two main types of asset classes: Bonds and Shares (or stocks). While both can help you build financial security and enhance your wealth, they function in very different ways.
                                                                                                                 



Investing in bonds

A bond is a loan given to a company or government. The investor lends their money to the issuer in exchange for a fixed regular interest rate and repayment of capital¹ upon maturity of the bond. Bonds can be traded on the secondary market² on their respective stock exchange³. This means that your investment value throughout the term of the bond can change based on market supply and demand. Bonds are considered to have a lower risk level than shares, due to their limited volatility⁴ in nature. As a result, they might not be able to keep up with inflation⁵, especially if the offered interest rate is low. The ideal investor would be someone who requires a steady level of income whilst taking limited risk. 

Investing in Shares

On the other hand, when purchasing shares, you are buying part of the company. Unlike bonds, shares do not generate fixed interest. Instead, they aim to generate capital growth in the long term, often outpacing inflation. Historically, global stock markets have delivered strong long-term returns. Despite not distributing interest, one can receive dividends. Dividends are earnings which the company decides to distribute to its shareholders; however, it is not a requirement to do so. Shares are considered to be higher risk, due to higher market price volatility. The ideal investor would be someone with a higher risk tolerance, and is ready to invest for the longer term.


Which is better?

This depends on your investment goals, risk tolerance and time horizon. If you are a pensioner who wishes to earn another form of income and not seeking to take a large amount of risk, you should opt for bonds. But if you're younger and willing to invest in the long term, you should opt for shares due to their out-performance compared to other asset classes in the longer term. This is also applicable if you are an older investor wishing to invest a sum for the long term to be inherited by your children or grandchildren.

Naturally, it is essential to diversify your portfolio by investing in different asset classes. In my next post, I will explore how combining different asset classes - such as bonds, shares and even open-ended funds - can help reduce risk whilst maximizing returns.



Glossary

Capital – Wealth in the form of money or assets, used or available for investing. In investing, capital typically refers to the funds an individual or business uses to purchase assets or generate returns.

Secondary Market – A marketplace where investors buy and sell securities they already own, rather than from the issuing company. For example, when you buy shares on a stock exchange, you're participating in the secondary market.

Stock Exchange – A regulated platform where stocks, bonds, and other securities are traded. Examples include the New York Stock Exchange (NYSE) or Malta Stock Exchange (MSE).

Volatility – The degree to which an asset’s price fluctuates over time. Higher volatility means greater risk, as prices can change rapidly and unpredictably.

Inflation – The general increase in prices of goods and services over time, which decreases the purchasing power of money. Investments often aim to beat inflation to preserve value






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