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.

Over the Counter Stocks

Holding preferred stocks usually assures the stockholder of getting a fixed amount of dividend which is also higher when compared to the dividend paid out for common stocks, and the dividends for common stocks are not known by the stockholder until they are paid out.  The value of common stocks depends on the fluctuations of the market, but at the same time buying these stocks is better when compared to buying penny stocks.  To the common man the common stock will be more tempting because of its high growth prospective in a faster way, and also investing in a large cap company of a company stock is much preferable.  Even though preferred stocks give out higher dividends, in the long run common stocks tend to give higher profits when compared to preferred stocks, as the value of common stocks moves along with the market movement, they are mostly preferred by investors. 

            For an investor who invests in common and preferred stocks, even if a company goes bankrupt it would not make much difference as due to his continuous and daily monitoring of the common stocks he will be in a position to sell off the stocks to his advantage.  Over the counter markets are usually not traded in the stock market but are rather traded through a dealer who in turn directly deals with the sellers and the buyers.  These are mostly listed in the over the counter bulletin boards, bonds fall into the category of the over the counter markets as they are not directly traded in the market, these markets are also important as they give the investor an alternative to being invested in markets and they also help investors to concentrate on smaller stocks which have a greater potential to grow.  But investors should be very cautious and do extensive research before investing in such over the counter markets.