INSIGHTS SUBSCRIBE 

×
LIKE WHAT YOU'RE
READING?
Keep up to date with the latest
investment insights with our
eNewsletter

SUBSCRIBE 
TOP



SHARES VS BONDS - WHAT'S THE

DIFFERENCE?
Roy Davidson, 24 October 2018
Shares and bonds are both important parts of any investment portfolio. Here, we explain the key
differences between the two and when it might make sense to own more shares than bonds, or
vice versa.

What are the key differences between shares and bonds?

Shares are an ownership stake in a company. When buying shares you’re entitled to your share of
the company’s profits which you will receive through dividends, or through capital gains on your
investment. With shares, you are participating to a larger extent in the success, or otherwise, of
the company in question. Shares therefore offer the most upside, but also carry a greater degree
of risk.

With bonds (also known as fixed income), on the other hand, you are essentially lending your
money to a company (or government). In exchange for this you will receive regular interest
payments at a fixed rate for a set period of time. You do not participate in the company’s success
in the same way as if you owned shares, but bonds carry a lower amount of risk and provide much
more income certainty.

An example
To illustrate the differences, let’s look at an example.

Auckland Airport is listed on the NZX which means investors are easily able to purchase shares in
the company. Auckland Airport also regularly issues bonds in the local debt market.

Let's assume, based on our forecasts, shares in Auckland Airport provide a gross dividend yield of
4.4%. On top of this, an investor would also benefit from any future positive performance. For
example, if passenger growth picks up then shares would likely rise in value and dividends in
future years would increase. Auckland Airport’s share price has risen by 12.9% per annum over the
past five years while the dividend has increased from 12 cents per share in 2013 to 22 cents per
share in 2018.

However, should performance deteriorate - maybe passenger growth stalls or there is an adverse
regulatory ruling - shares could fall in value and an investor makes a negative return.

Another option is to purchase bonds issued by Auckland Airport. The company’s most recently
issued bond currently provides investors with an interest rate of 3.45% until its maturity in six
years’ time. These interest payments are highly predictable and provide investors with a steady
source of income. But they offer no upside if Auckland Airport performs well.

Should you own shares or bonds?

An investor’s allocation between shares and bonds (along with other asset classes like property
and cash) depends on a number of factors including time horizon, income requirements, and risk
tolerance.

For example, a higher weighting to shares may be warranted if you have a longer-term investment
horizon. This is because, while the return from shares is more volatile, they provide the greatest
returns over the long-run.

However, if you expect to need to call on your investments in the next few years – perhaps a house
deposit is on the cards – or reliant on the income from your investments for day to day expenses
in retirement, then a higher weighting to bonds would be make sense.

< Previous Next >

RELATED ARTICLES

How can businesses withstand Jargon Buster: PE ratio > 5 dos and don'ts for rookie An open letter to the Tax
an economic slowdown? > investors > Working Group >

About us Careers Login Call Us: 0800 272 442

Our People Investor Education Contact Us
Our Community Documents Terms & Conditions

Our Achievements Privacy

Roy Davidson is a Research Analyst at Craigs Investment Partners, his Adviser Disclosure Statement is available on request and free of charge under his profile
on craigsip.com. This article should not be deemed as advice. For personalised investment advice contact an Investment Adviser or phone 0800 272 442.
Disclosure statement available free of charge and on request, visit craigsip.com. Read our full disclaimer here. Craigs Investment Partners do not accept liability
for the results of any actions taken or not taken upon the basis of this information. While every effort has been made to ensure accuracy, no liability is accepted
for errors or omissions herein.
Craigs Investment Partners Limited is a NZX Participant firm. Adviser Disclosure Statements are available on request and free of charge.
© Copyright 2018 Craigs Investment Partners Limited