Are stocks more risky than bonds? Why would I want to buy stocks?

An easy answer to the question of, "Are stocks more risky than bonds?" is, "Usually but not necessarily." Investing is a little more complicated than to just be able to say that stocks are more risky and therefore bonds are safer investments. Theoretically, you could loose more money investing in bonds, than you could ever loose investing in stocks.

The Risk of Bonds
In general the risk of buying a bond should not be as high as the risk of buying stock. When you buy a bond you are given a promise that the amount you paid for the bond will be returned. In addition the debtor agrees to pay you a set interest rate until the loan has been repaid. You have the date the bond was sold and the date the bond will be fully repaid (the maturity date). There should not be any surprises and you should be able to expect regular payments of regular amounts within the time period that you have agreed upon.
Usually a bond works as it is designed and the investor walks away with an easily earned howbeit modest increase. However, there are instances when a bond never gets re-paid. If a company defaults on their loan you could never see your bond money again. A company can dissolve completely and leave you with nothing. If there are assets remaining after a company dissolve, you hold the advantage as the bondholder of being entitled to your share before the stockholders are paid. But, even this is occasionally not enough to equal your initial investment and you are left with negative equity.

The Risk of Stocks
With stocks there are fewer guarantees than if you were to buy a bond. At least with a bond you are given a written promise of re-payment. With a stock no one is obligated to pay you back. You own all the risk. Theoretically you could make a significant stock purchase one day and loose all of your money the next day. There is no safety net whatsoever. Stocks are definitely more volatile than bonds. Stocks are up one day and down the next. It can be quite the task to manage all of your stock investments. Stocks need constant attention. You will always be managing when to buy and when to sell. Even the most educated guesses of what the market might due to your stocks are just that, guesses.

Why Would You Want to Buy Bonds?
Generally the disadvantages of buying bonds are far less likely to happen then the advantages. Bonds are especially more safe under certain conditions. Purchasing a government bond is much safer than a company bond (not to say that the company bond is always going to default, but the government has more access to funds than does the average company). Bonds have definite beginning and maturity dates. This allows you to know exactly how long you will wait until you see the return on your investment. The right of a bondholder to make a claim on company funds supersedes any stockholder.

Why Would You Want to Buy Stocks?
Although the risks are higher when investing in stocks the returns are higher as well. For example you can ensure that you never loose more than a certain amount of money by putting a stop loss order on your stocks. People make their fortunes, plan for retirement, or make a living through investing in stocks. Over the course of time the stock market as been improving. Those who have made long term investments are seeing significant returns. Yes, buying stock may be more risky than buying bonds, but there are safety nets that investors can use.

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