Investing in bonds and equities

Published November 12, 2020, 5:00 AM

by George S. Chua

During these difficult times, having some savings is always a good idea.  However, once you are able to accumulate some investible funds, you are still faced with the choice of where to make that investment.  The two most popular and liquid investment options are bonds and equities.  Bonds are fixed income securities that either pay out interest on a regular basis or in the case of a zero coupon bond, pays out the face value at maturity date and your effective return is based on the discounted price you are able to purchase the zero coupon bond for.  Registered fixed income securities are traded on the Philippine Dealing and Exchange Corp. (PDEx).

Equities on the other hand, are investments where you buy shares of stock in a company with no guaranteed or indicated rate of return.  You take the risk on the performance of the company and the market driven price of the shares of stock.  Your gain or loss will come from the buying and selling of these shares and for some companies, dividends are declared and given to the shareholders.  Essentially, listed companies shares are traded on the Philippine Stock Exchange (PSE) and has more price volatility than fixed income securities. 

There are a number of factors to take into account in deciding which type of instrument would be more suitable for you.  For investors who are risk averse and have a short term horizon, fixed income securities are the more likely option.  You can select from a number of tenors ranging from short, medium and long term.  Barring any default, at the end of the term, the principal payout is always to face value of the paper.

Fixed income securities when traded in the secondary market during its life can have a change in the price it is traded at.  Typically, when the prevailing interest rates are higher than the coupon of the security, the security will be sold at less than face value.  On the other hand if the market interest rates are lower than the coupon, the paper will be sold at a premium since it offers a higher than market interest rate.

Traded equity shares on the other hand have less bearing on their par value.  Companies that have done very well for a number of years typically trade at multiples of their par value.  On the other hand it is also possible for shares to trade at below their par value, especially when the company is not doing too well or when there is a downturn in the market.  Typically, the movements of share price are much more volatile than the movements in interest rates so the resulting price swing in fixed income securities are much less than that of equities traded in the PSE. 

Traditionally, the rate of return on equities are much higher than bonds over the long term.  Thus, younger and more aggressive investors who have a long term investment horizon put their money on listed equities.  Investors need to balance out the risk they take with the return they get.  It is also sound practice to have portfolio diversification to minimize your risk, meaning investing in both bonds and equities and with different companies.  Being able to live off on your investments requires a firm understanding of the markets, the risks involved, experience and of course luck!

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