As appealing as stocks might look with the returns, you must also keep in mind that it comes with volatility, uncertainty, and a lot of research to keep an eye on the market. It might seem like a lot of effort to put in there to stay in such a market but it’s totally in the investor’s hand to make a call that is apt according to their risk appetite.
Bonds on the other side are categorized under the fixed-income segment. As the name suggests, it can make fixed returns for you and of course, a little research is essential to check upon the issuer’s profitability on a yearly basis to make sense of their debt requirements. That is just to stay in line, whether it can stand up to its obligations of paying regular interest and the principal back on maturity.
That’s why, let’s discuss attractive uncertain returns that might look eye-catchy while the certain, fixed returns can come out as relaxing.
The Psychological Triggers on the Investors
This is the crucial thing that acts upon any investor in any market but specifically in the stock market. Let’s check out the impacts on both markets to know about this standpoint.
On a generic note, the stock market’s volatility can sometimes be irrational and erratic. As all the investors don’t really think straight as per their research but think in ways that are vivid to different scenarios of the market conditions.
One such example is loss aversion, say an investor made a profit of Rs 25,000, this must be a case of delight to the investor, but their thinking is more averse to a loss scenario which could make them tenser to have lost Rs 2,000 for that matter than having gained Rs 25,000. Due to this, they come to a conclusion to sell off whatever they own as a result.
Let’s take the scenario of confirmation and availability bias. When the investor generally begins with their research on the easily available information on the internet and neglects the crucial information that is more of a deciding factor to make a call on the market. This incomplete research allows them to only see the view that confirms the available information. And miss out on one data point that can either alter or give double confirmation.
What happens in the bond market scenario? The only wrong that can happen in the less volatile market is the actual update of the issuer details. The companies might have missed updating on the negative announcement. That could possibly keep the investors at a loss when the issuer fails to make its obligation to pay the interest to the investors.
The Psychology of Investors That Maybe Irrational
The Risks Involved in the Market
There isn’t a market with no risks involved and we all agree. But how is it in both markets? Before we understand the risks in the market, it is quite essential to understand how both markets perform.
Stocks are more like having ownership in the company when you invest in the market and it depends on the performance of each of these companies. That leaves us with uncertainty regarding the dividends or capital gains that one can make. Hence it involves more risks and at the same time, it holds the potential to double as well in a matter of less time.
While the bond is more like giving a loan to the company over some time on which you’ll receive interest until they repay the principal. The only risk that it can imply to an investor is when the issuer will default on making payments. But that’s highly likely if you have invested in a high-rated bond.
How to Leverage Volatility?
How about the Guarantee of the Principal?
In stocks generally, while you are risking your money to make higher returns, the principal amount invested initially is also in the risk. Whereas in the bond market when the principal is invested, you get to receive timely assured interest, and the investor can also expect a return of the principal amount if they have invested in high-rated bonds. Though, indeed, the returns from the bond investments aren’t as high as stocks, it ensures fixed returns, which isn’t the case in stocks.
What are you going with?
Seeing the overall picture in every aspect of the market, bonds seem less risky, safe, and relaxing resulting in less stress on an investor and being advantageous as well. It’s usually on the investor to decide on the type of investment that they want to make based on various other factors than a few of those mentioned above.
These instruments give an investor a different choice to pick the space or the environment that they want to create for themselves while they put their money in a selective instrument.
It lastly leaves us to ask the investors a question whether they are a risk taker or a safe player. In a contextual sense, whether they look forward to eye catchy instruments or a relaxing one!
