The investors are usually have a first choice to invest their money in bonds or stocks, and its is very hard for them to choose between the two, they first find the company which looks best investment contender and having a good economic and business sense, it is the choice of investor to invest in either bonds or stocks.

Bonds:

It allows the investors to let somebody else use their money and they receive interest.

Stocks:

It’s an investment which gives the ownership interest of the corporation to the investor.

These two different types of investments are influenced by company’s proceedings in following ways:

Bonds:

Bondholders do not have any kind of ownership of the corporation; they basically let the corporation use their money for a time period under a defined rules and agreement which a company should follow to be in the good books of the bondholders. They receive primary investment back from the company as soon as the bond comes to maturity stage. Meanwhile they receive the coupon or interest on the bond generally twice a year.

Stocks:

The exchange price of stocks is set by the market; these prices are usually determined by the company’s financial position, reports and industry ground rules.

• Investor’s invest in those companies having higher growth.
• They also prefer to invest in those company’s which are undervalued in the market but have probabilities of growing in future.

The stockholders receive payment only when the stock prices increased.

Choosing between Stock and Bond:

There are many things which influence investors; the biggest problem faced by the company is that what is good for one stakeholder may be bad for other stakeholder. Following are some cases which may develop or harm the stockholder or bondholder’s positions.

Case 1: Company Raises its Dividend

When company raises the dividend,

• The stockholder’s will collect the higher payments, and stocks reacts positively in this case.
• Bondholder’s may face difficulty because due to this raise in dividend the company lacks the ability to pay the bondholder’s, so in this case the bondholders will react negatively.

Case 2: Stock Buyback

When company declare the buys back of stocks,

• The stockholder’s are satisfied with this declaration, because this decrease the shares outstanding and then the profit is shared among few shares and this will increase the earning per share (EPS) on each share and comparatively the stock price also increases.
• Bondholder’s are not satisfied with this declaration, because by doing this the company will reduce the cash in hand and their balance sheet will not attract the bondholder’s.

Case 3: Company Become Insolvent

When it happens,

• Usually the stocks fall abruptly.
• Bonds also sell-off, but the bond prices are generally better than stock prices in this case.

Case 4: Company Increases credit Line

When company does that

• Stocks will remain unchanged infect they might react positively because company will not issue the new shares.
• Bonds, on the other hand may react negatively because this indicates that the company is increasing its borrowed funds.

Case 5: Company Borrows Money for Expansion

When company borrows money,

• Company has to pay interest on borrowed money so the stockholder’s earning per share (EPS) affects negatively.
• The value of bondholder’s investment will go down because the probability of risk increases and it will increase the debt load. But in this case of borrowing money for expansion the stock prices will be less affected as compare to the bonds.

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