About Stocks and Bonds Investments

Lim, Do Yeub

(From Corporate Finance Institute)

According to data from World Federation of Exchanges, the value of the world stock market was estimated at about 89 trillion dollars last year. How about the bond market? According to data from SIFMA, the value of the global bond market was about 123 trillion dollars last year. Because they are forming huge capital markets, their impacts on the world economy are powerful. I will talk about stocks and bonds today. I would like to inform you of 2 things in detail. One is about the rights of investors, and the other is about different riskiness between stocks and bonds. Let’s start with the rights of investors.

Rights of stock and bond investors are different from each other. Mr. Kwak from the Economics Education Institute explains shareholders as owners of companies and bond investors as borrowers. Shareholders have rights to participate in the firm’s management. According to an article from Edaily in March, Korean National Pension Service has exercised a great power on employment of Samsung board directors as it owns about 9% of total stocks. Also, shareholders have rights to receive dividends, which are parts of a firm’s profits. According to an article from SBS Biz in September, Samsung Electronics has given dividends of 4.9 trillion KRW during the first half of this year. On the other hand, bond investors just have rights to receive principal and interests. They can’t participate in the firm’s management like shareholders. We just learned about the rights of investors. Now let’s talk about riskiness.

Riskiness of stocks and bonds is also different from each other. Stocks are usually considered as riskier investment than bonds. It is hard to predict the stock price since there are so many factors which can affect the stock price. According to data from NASDAQ, the stock price of Gamestop changed a lot during several days in January this year. As you can see on the graph, it gets 200 dollars more expensive during just one day, and 150 dollars cheaper right away the next day. This is why stock investment is referred to as ‘high risk, high return.’ In contrast to stocks, bonds are considered as low risk investments. According to an explanation on Korea Exchange website, bonds have little chance of loss, and the price doesn’t fluctuate as much as stocks. But because it has low risk, expected profitability is also lower than stocks. According to Bank of Korea Statistics System, estimated profitability of Korean bonds with a 5-year maturity is only 1.8%, whereas KOSPI has grown about 150% during the last 6 years. Contrary to stock, bond investment is referred to as ‘low risk, low return.’

Today, we learned about stocks and bonds. Stocks and bonds investors each have different rights, and the riskiness is contrary to each other. Even though how the market moves is totally unpredictable, I think knowledge will be worth it for our investment. We all want to have more money. For this, we need a wise investment decision. In order to invest well, it is important to learn about capital markets. People refer to the capital market as a battlefield. Let’s be prepared before going to a battlefield, and win the battle.