Bonds vs stocks

Share trading​ is the process of buying and selling stocks within the share market with the aim of making a profit. This involves taking direct ownership of the asset. If you decide to purchase the instrument at spot price, then your ownership stake will be a percentage of how many shares you decide to invest in. On the other hand, when speculating on the price movements of shares with a spread betting​ or CFD trading​ account, you do not physically own the underlying asset but instead, you are essentially opening a position and placing a bet on whether you think the stock price will increase or decrease. Profits will depend if the markets move in your favour or not.

The treasuries market is made up of corporate, municipal and government bonds, also known as gilts in the UK. Bonds are fixed-income instruments that represent a long-term lending agreement between a borrower and a lender, often with the aim of financing external projects. The contracts are drawn up with a future maturity date, either short-term (up to 3 years), medium-term (around 10 years) or long-term (around 30 years). The borrower also promises to pay a fixed or variable interest rate, depending on what is agreed at the start of the contract. Read our article on ‘what are bonds?​​’ for more information about bond trading.

In general, bonds are usually seen as a less volatile investment than stocks. This is due to the stability of the bond market, and the fact that stock prices are constantly changing depending on external events, including economic and political factors. However, some sectors within the stock market have seen a steady increase in popularity and value over recent years, which makes companies more appealing for investors in the long-term. For example, pharmaceutical stocks and streaming stocks have proven successful in times of crisis, such as throughout the COVID-19 pandemic.

This also reflects the debate of bond returns vs stock returns. Although bond rates of return are generally lower than those of the stock market, there is more information available about their income flow and it is easier to predict bond performance and changes within the market. Therefore, you could say that they are a relatively safer investment. However, some traders thrive on the unknown and volatility within the stock market, therefore there is always the chance that taking a risk on share trading will pay off in the form of higher returns but could also lead to losses.

Read about some of the most popular bonds​​ on our platform right now and how to get started trading on the bond market.

Bonds and stocks are both derivative products, meaning that the contract’s value is reliant on the performance of an underlying asset or benchmark. Other examples of derivative products include forwards, futures and options, all of which can be used in the process of stock and bond trading.

Both instruments are sensitive to interest rates and preferred stock and bond prices tend to decrease when interest rates increase. This is because cash flows are discounted at a higher rate, resulting in a better yield, in particular within the stock market. Read or guide to the best dividend stocks in the UK.

Within the financial markets, there is often correlation between a number of assets that have an effect on one another. In general, the assumption is that there is a positive correlation between the stock and bond markets. Therefore, when bond prices decline, stock prices will start to decline as well. This is because, if the cost of business rises due to inflation, then lenders will be less likely to issue bond contracts. This will then affect individual companies and their own share price will fall.

Periodically, the relationship between stocks and bonds has been proven to move in the opposite direction. Instead, bonds go up when stocks go down. This depends on the volatility of the markets, especially when inflation and growth of the equity market is low.

Often in these situations, traders decide to open positions for both stocks and bonds. An advanced trading strategy for cross-market assets is pairs trading​​, where you can open one long position and one short. However, there must be a positive correlation at the time of settling the contract for the strategy to work. The aim of pairs trading is to hedge risks in your trading portfolio by balancing positions that act as a hedge against each other. For stocks and bonds, you may be able to offset the risk of one declining long positon by opening another short position with an adverse correlation. Trading both equity and debt securities vastly increases the diversity of your trading portfolio, which means that the risk is also balanced between assets.

Many investors choose to purchase stocks and bonds outright at spot prices, meaning that they will have a part ownership stake of the underlying asset. However, another method to get exposure to the stock and bond markets is through our derivative spread betting and CFD accounts. In particular, spread betting allows you to trade tax-free within the UK on the price movements of thousands of stocks, bonds and exchange-traded funds. Please note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

If you have reached a conclusion about whether you would like to trade stocks, bonds or both markets simultaneously, then get started by registering an account with us.

You can also practise ETF trading​ through spread betting and CFDs, and trade on our most popular bond and share ETFs. These have varied liquidity, dividend payouts and other risk rates. We offer a wide range of exchange-traded funds, including those from iShares, Vanguard and SPDR.