Corporate bonds vs equity shares: Which is easier to sell and less risky?

Corporate bonds and equity shares are two different types of investment options. While corporate bonds are debt instruments issued by a company, its shares represent ownership in the company.

Although corporate bonds may appear less risky and easier to sell to recover your investments in times of need, this may not always hold true in real-life situations. That said, this article explains the key differences between the two instruments, including which is easier to sell and which carries less risk.

Which is more liquid or easier to sell?

Listed equity shares are easily tradable during market hours, hence they are easy to sell. In the case of corporate bonds, it is easy to sell before the maturity date when they are listed. However, you will find it difficult to sell your corporate bonds before maturity if they are unlisted. In short, corporate bonds are not as liquid as equity shares.

Which is less risky?

Both equity shares and corporate bonds carry some risks. As a thumb rule, however, shares are riskier than bonds. More so because the price of shares depends on the demand-supply dynamics in the stock market.

However, corporate bonds also have several associated risks:

• Credit risk: It arises when the company defaults on interest payments or does not pay back the principal

• Prepayment risk: It arises when the bonds contain clauses allowing the corporate to redeem before the due date. In such bonds, the corporate may redeem when the interest rate is down, and the price of the bond is up. In such a situation, you will only get the face value of the bond even as the market value of the bond is higher.

• Interest rate risk: This can arise in the case of listed bonds. Bond price usually goes down when the interest rate goes up.

• Liquidity risk: This can arise when you plan to sell the bonds before maturity but fail to find a buyer.

What happens when the corporate closes down

If the corporate closes down, the shareholder can get the face value of their investment back, but only after all other stakeholders are paid.

However, bondholders are at an advantage when the company closes down, as they get preference over shareholders in getting the face value of their investment.

What happens when you own a share vs a bond

When you own a share of a corporate, you become a part-owner of the company, and you may even enjoy voting rights. In case you own bonds of a company, you have basically lent the price of the bond to the company. Bond owners do not enjoy any voting rights.

Equity shares generate returns in terms of capital appreciation by way of an increase in their price. In contrast, returns from corporate bonds are in the form of interest paid by the corporation. However, if your corporate bond is listed, you may earn some capital appreciation as well.