Why are bonds considered less risky than stocks?
Bonds overall are more reliable than stocks due to their fixed interest payments and the prior rights of bondholders over stockholders if a company declares bankruptcy. All investments are designed to produce income or grow in value (sometimes both). Of the two, income is much more reliable than growth. After all, a company s management cannot make its stock price rise, but it can pay interest to its bondholders and declare stock dividends for shareholders. Therefore, income-producing investments are considered safer (in this case, safety is defined as reliability) than growth-oriented investments because investors can expect to receive their income more reliably than they can expect an investment to grow in value. The greater certainty in bond cash flows over stocks has a price; historically bonds have underperformed stocks with respect to investment yields.
