Question

Why does stock have more potential for higher returns than bonds?

Answer 1

Stocks have more potential for higher returns due to higher risk compared to bonds.

Step-by-step explanation:

Stocks have more potential for higher returns than bonds because they carry higher risk. Over a sustained period of time, stocks have an average return higher than bonds, and bonds have an average return higher than a savings account. This is due to the fact that stock values can grow or decline by a large amount, resulting in higher potential returns.

For example, the S&P 500 increased 26% in 2009 after declining 37% in 2008. On the other hand, the value of a bond, which is influenced by interest rate fluctuations, varies less than a stock, but more than a savings account.

Answer 2

There is a higher possibility for stocks to have higher returns compared to bonds because there is a greater risk that if the company fails, all of the investments of the stockholders will be lost. On the other side, there is a return to stockholders that can possibly minimize what they can earn investing in bonds.