Shares and bonds, i.e financial securities of ownership and debt, are two very popular investment products.
Throughout 2018, French households purchased nearly €4.3 billion worth of listed shares, according to the annual report of the regulated savings observatory. Thus, although it still ranks behind real estate, stock market investment holds an important place in French wealth. Although shares are particularly popular, bonds, which are less well known, can also offer good capital gains.
Here is a comprehensive summary of the information you need to choose the financial security that best suits your investment objectives between shares and bonds.
A share is a title of ownership representing a part of the capital of a company. In order to access financing, companies, whether listed or not, issue shares in order to attract investors.
In fact, when a shareholder owns one or more shares, he or she has a right to information about the activities and development of the issuing company, as well as a right to vote at the general meeting. In addition, he or she receives dividends on the company's profits.
A bond is a debt security representing the debt of a company, a public or local authority, or a State. Thus, an investor who buys one or more bonds - or "bondholder" - lends money to a company wishing to finance its development or to pay off its debts. In return, he or she receives coupons guaranteeing the repayment of the sum lent, with interest.
From the perspective of the issuing company, shares allow diversification of funding sources, while bonds allow diversification of borrowing sources.
From the investor's point of view, shares offer a right of control over the company's activity, proportional to the number of shares of ownership.
On the stock market, share prices depend on market conditions, i.e. the levels of supply and demand from investors. These conditions are correlated to the company's performance. Bonds offer the investor a return that is determined when the securities are purchased. On the stock exchange, the price of bonds also depends on market conditions, but also on the evolution of interest rates.
A bond issued by a company that is considered strong by investors, and with large coupon amounts, will generally enjoy strong demand on the financial markets.
Shares allow investors to receive dividends. These are calculated according to the annual performance of the issuing company, and in particular according to its net income. Each year, the amount of dividends paid is determined by the company itself at its general meeting.
Caution : if the company has a loss-making annual performance, it is quite possible that it will choose not to pay any dividends to its shareholders; thus, dividend income is not guaranteed.
In addition, investors usually expect to make capital gains by selling their shares after a certain period of time (weeks, months, years). Capital gains are indeed the main interest of stocks for traders.
Bonds allow investors to receive coupons corresponding to the interest paid by the issuing company.
These can be collected monthly or annually, and are of two types :
The face value of the bonds (i.e. the amount loaned to the company) is repaid in full at the maturity of the loan.
Shares have a much higher volatility than bonds. As they are more sensitive to market trends, shares can generate significant capital gains as well as a total loss of the sums invested.
Bonds are safer, as long as the investor holds them to maturity, or sells them during a period of low interest rates. Even with bonds, traders are not immune to reselling at a loss.
Thus, shares and bonds are respectively financial securities of ownership and debt. They are two specific types of investments, which do not have the same returns, risks or time horizons. Neither is fundamentally superior to the other : it all depends on the investor's profile, objectives and tolerance for risk.