Investments in securities: which is more profitable stocks or bonds

Today, the investment market is so wide that many potential investors are lost in the variety of products offered. Among the latter, the most understandable and simple are investments in securities. Stocks and bonds confidently occupy their position in the market, and are popular among investors who support various investment strategies.

What is investing in securities

This is an investment of funds through the purchase of securities with the possibility of obtaining a certain profit in the future. Getting the latter involves:

• payment of dividends on shares or coupon income (coupons) on bonds. Payments on shares and bonds are made periodically: on shares quarterly, semi-annually or annually, on bonds 2-4 times a year;
• making a profit from the difference in the value of a security when it is sold. An investor can purchase a stock or bond at a certain price, sell it at a higher value after a while and thus earn.

Instruments and forms of investment in securities

The concept of a security includes shares of companies, government (OFZ) and corporate bonds, promissory notes, derivatives (derivative securities). All these are tools with which you can earn income.

An investor can independently purchase shares or bonds, but he needs an intermediary to enter the stock exchange. Intermediary services are provided by professional market participants – brokers.

For those who are not ready for independent trading, it is possible to invest funds through:

• trust management of banks;
• mutual funds (mutual funds);
• conclusion of an individual management agreement with an investment company.

Cooperation with professional managers is carried out on a paid basis. For example, mutual funds charge up to 5% of the value of an investor’s assets per year for their services, and they do this regardless of the investment result. The services of banks and investment companies often cost 10-25% of net profit. At the same time, none of these managers is responsible for the result, so the risks of losing part or the entire amount of investments remain.

When trading independently, risks also exist, and in addition, there is always the possibility of choosing an unscrupulous broker. That is why it is important to rely on the following criteria when choosing an intermediary:

• the broker has a license to provide intermediary services in terms of entering the market;
• professionalism and reliability;
• membership on the RTS and MICEX exchange (for the Russian Federation);
• the amount of the commission fee charged to investors;
• the possibility of providing remote access to trading.

Formation of an investment portfolio

It is impractical to invest money in shares of one company or only in bonds, because even a highly qualified specialist will not be able to calculate all the risks and how a particular product will behave over time. The rise and fall in the value of securities is influenced by many factors, including the state of the world economy and the political situation in the world.

In order to reduce risks and increase profitability, it is more reasonable to invest in securities through the formation of an investment portfolio. This may include both stocks and bonds, as well as other investment instruments.

The advantage of an investment portfolio is that when some securities fall in price, the value of others can grow rapidly, which means that the investor will not be at a loss. In addition, when forming a portfolio, you can use a specific strategy or a combination of different strategies. For example, an investor distributes capital, entrusts part of the funds to a manager who uses a classic strategy, and the remaining funds to managers who prefer a moderate and aggressive approach.

If an investor intends to get a high income, he invests money in the purchase of high-risk instruments, if he pursues the goal of obtaining a stable income, he invests in highly liquid but reliable instruments or distributes capital between the first and second.

How to start investing in securities

The following algorithm is proposed as a reminder for novice investors intending to invest in securities:

1. Decide on the starting amount, which in case of failure is not a pity to lose. Remember that a reasonable investor never invests all his capital and does not use borrowed funds for this. The optimal starting amount is the amount in the range from 50 to 100 thousand rubles.  With this money, you can build a portfolio that includes various investment instruments that can bring a noticeable income.
2. Open a brokerage or individual investment account online or at the broker’s office. At this stage, if you are not confident in your own abilities, you can decide to transfer the capital into trust management.
3. Install a trading platform that provides access to trades and top up your account. Access to the platform is provided by a broker, and replenishment of an open account is possible, as a rule, in several ways: through the application, by bank transfer, in cash.
4. Choose the investment tools. As mentioned above, it is not necessary to invest in one product, you can build a portfolio of several securities, including stocks, federal loan bonds, corporate bonds.
5. Buy securities. Monitor the market situation in order to sell securities profitably, regularly receive income in the form of coupons or dividends.
6. When the first profit appears, you can withdraw funds or invest in the purchase of new stocks and bonds.

Which is better: stocks or bonds

It is generally assumed that stocks and bonds are equivalent in terms of liquidity, as well as the time spent on buying and selling them. If we talk about profitability, it will depend on the type of investment instrument. For example, preferred shares, unlike ordinary shares, provide their holder with a fixed income independent of profit. Holders of discount bonds purchase securities at a value below the nominal value, but at the time of repayment they receive the full nominal value. In contrast, holders of interest-bearing bonds receive a one-time profit or coupons (multiple payments).

Comparative analysis of securities shows that:

• in terms of liquidity and terms, the instruments are equivalent;
• in terms of yield, stocks prevail over bonds;
• in terms of reliability, bonds outperform both ordinary and preferred shares.

Since there is no unambiguous advantage in favor of one or another paper, the most profitable option is a portfolio that includes various investment instruments.

Recommendations of professional investors

Summarizing the above, we will highlight a few of the most important points:

1. It is not necessary to invest all available funds in one product. It is better to assemble a portfolio in which securities of various companies, including government bonds, will be present;
2. The opening of the IC allows you to return personal income tax, provided that the purchased securities will not be sold for 3 or more years;
3. If you purchase OFZ, you can not pay income tax;
4. Buying shares of high-tech companies allows you to shorten the grace period. Holders of such securities are obliged to keep them for a year. The list of companies can be found on the website of the Moscow Stock Exchange.
5. According to experts’ forecasts, this year it is worth paying attention to securities issued by technology companies, companies specializing in green energy and video games. The space industry and emerging markets are also promising.

Published: 29 January, 2022