Bonds vs. Stocks

Stockholders own shares of a particular stock whereas Bondholders are creditors of a company; the bondholders can influence the company’s management to stay away from risky projects and can also raise the asking interest rate thereby raising the capital cost for the company.  Usually stocks are unsettled but can be sold at any time on the other hand bonds have a fixed period of maturity after which the amount is retrieved.  When stockholders take up risky projects they also have an advantage when the stock rises, bondholders are more interested on the return of their investment.  The bondholder will get interest irrespective of the bond making a profit or a loss but the stockholder will not be getting any dividend if the stock doesn’t make profits. Compared to the notion that bondholders have more advantages then stockholders, it can also be noted that a stockholders penchant for stocks which are risky can have a huge impact on the finances of a bondholder.

Using the tool of dividend discount model we can estimate the value of a stock basing on the future dividends being paid after discounting to reflect the current value of the stock.  Using this model investors are able to pick up and invest in stocks which are likely to give good returns due to the extensive research taken up by the company’s.  But it can only evaluate the value of a stock which pays out dividends which is the major negative point of this model, but for some stocks like telecom and technology in which the investors only look for a rise in the price of the stocks this model will not be of much help in envisaging the stock price.  And this model also requires input of accurate data, which sometimes becomes difficult in predicting the accurate stock value.