Why bonds are less risky than stocks

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We had a good read. For the benefit of yourself. Be sure to read to the end. I want you to get good knowledge from Mortgage Interest Rates Today . Investments: Episode ElevenIt's fairly common knowledge to have a healthy portion of your portfolio allocated to fixed income (bonds) for diversification. Most people understand that bonds are more stable than stocks but few people realize why they are less risky.Here are some of the reasons why:Bondholders are paid before stockholders in the event of a liquidation.Return of capital is expected at some date certain in the future for bonds. Companies rarely return capital to stockholders.Bonds normally pay a coupon (interest) twice a year. Stockholders may receive a dividend payment but only after bondholders are paid.Risks to bondholders are default risk, interest rate risk and inflation risk. These risks are amplified to stockholders. If a company defaults on its bonds it is likely that its stock price is toast.Market forces work on bonds just as they do on stocks. But, keep in mind the nature of bonds means that as an asset class the volatility is usually much less severe.More buyers (demand) means higher prices and lower yields.More sellers (supply) leads to lower prices and higher yields.The income producing structure of bonds serves as a natural floor for the asset class.

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