Advantages of Investing in Individual Stocks and Bonds
- Individual stocks and bonds help investors meet their financial goals.dollar bill image by jimcox40 from Fotolia.com
Savers constantly evaluate the marketplace for investment opportunities, and numerous asset classes exist to accommodate these demands. Among them are cash equivalents, stocks, bonds, real estate and mutual funds. Sophisticated investors often consider alternative assets, such as fine art, timber and limited partnerships, as areas for income growth. Despite the abundance of options, individual stocks and bonds are the preferred choice for many investors, who appreciate them for their liquidity, total returns and tax efficiency. - Liquidity describes the ease with which you may convert any asset into cash. Liquidity reduces overall financial risks and costs. Individual stocks and bonds enable you to liquidate your investment portfolio for cash within seconds, through organized financial exchanges. You may need to sell stocks and bonds for quick cash to meet emergency expenses, buy more attractive investments, or merely take profits.
Those with direct business investments, real estate, limited partnerships and collectibles may require several months, if not years, to find buyers. Because transactions occur less frequently, the value of these holdings may be unclear, as opposed to stocks and bonds, which provide trading quotes from deals that are negotiated each second. - Individual stocks and bonds offer the potential of competitive returns that help you build long-term wealth. Total returns are composed of capital gains and investment income. Capital gains describe asset appreciation between your purchase and sales prices. Investment income refers to the regular dividend and interest payments that stocks and bonds offer, respectively.
In general, individual stocks and bonds provide higher investment returns over time than competing savings accounts and mutual funds. These higher returns arise because savers expect additional compensation for taking on more risk--meaning the possibility of loss is also greater. FDIC coverage guarantees banking deposits, which translates into low risk and low returns for savings accounts.
Meanwhile, mutual funds offer diversification, which reduces volatility and total returns. Mutual funds are investment pools that own hundreds of different stocks and bonds. At any point, large numbers of these holdings may be losing money, and adversely affecting returns for the overall fund. Conversely, you may work to diligently research and purchase one individual stock that appears to be severely undervalued during recession. The profit potential for this individual stock is high, relative to mutual funds, if your research proves to be accurate. - Individual stocks and bonds allow for tax efficiency, as you manage capital gains. Capital gains may be described as either unrealized or realized. Unrealized capital gains refer to asset price appreciation that occurs while you still own a particular stock or bond. Gains are realized at the time that stocks and bonds are sold, and you must pay taxes on these profits. You trade individual stocks and bonds at your discretion, and budget accordingly to pay capital gains taxes. Mutual funds, however, are controlled by fund managers who make investment decisions on behalf of shareholders. Mutual fund shareholders are responsible for paying taxes on any resulting capital gain distributions, which are beyond their control and may occur at any time during the tax year.
