Corporate Bonds Vs. Equities

Corporate bonds and equities help channel capital into businesses to fund ongoing operations and investment in growth. Both equities and bonds represent a form of ownership of the company. If you are interested in owning equities or bonds, research some of the basic functions, benefits and risks of these two types of investments.

Corporate Bonds

• Corporate bonds are debt obligations used by corporations to raise money. A bond allows a corporation to borrow a certain amount of money from an investor. The investor, or bondholder, is a creditor for the corporation . In return, the bondholder receives interest payments at regular intervals according to the time the bond is active and the amount of the investment.

Income

• Investing in bonds carries certain advantages for investors. A bond generates income until the maturity date, so if you invest in a five-year corporate bond, you are lending money to the corporation for five years. The amount you invest is called the face value and works like the principal in a loan. In return for lending your money to the corporation for five years, you receive interest payments throughout that time.

Credit Risk

• Although bonds offer investors the chance to receive regular income from bond investments, there are risks to consider before investing. For example, bondholders receive interest payments from the money corporations make. If the corporation is unable to make money, bondholders do not receive interest payments.

  The risk of default varies among corporations, but riskier bonds often provide the chance of larger returns for bondholders but carry a greater risk of loss.

Equities

• Unlike bonds, equities represent a share of ownership in the corporation issuing the stock. According to the New York Stock Exchange, there are two broad categories of equities, or stocks, as they are also known. Buying preferred stock gives you priority over other stockholders to receive a share of the profit payments, called dividends. Common stock does not have priority over dividends but owners have voting rights at annual corporate meetings.

Benefits

• One of the most important benefits of owning equities is that you create wealth for yourself if the price of the stock increases in value. If you sell the stock at a higher price than the purchase price, you create a capital gain.

  In addition, investing in equities typically generates higher returns than if you were to keep your money in a savings account, a certificate of deposit or a similar low-yield investment.

Risk

• Like corporate bonds, equities also vary in risk. For example, a corporation that goes out of business loses value. This loss reflects on the stock price. You lose money if your stock's price falls below the price you paid.

  In addition, large and established corporations attract risk-averse investors who prefer more stability and modest gains. Buying stock in a new but promising company can multiply your investment, but you risk losing your entire investment.