Explain why bond prices might decline when stock prices rise?

Question

Does this have anything to do with stocks being a substitute for bonds and vice versa? Also, would you expect a stock to be a substitute or a complement?

I say substitute. Another reason I say that is because of the risk involved in bonds vs. stocks. With stocks at least you “own” part of the company in which you invested. With bonds you only “own” part of the debt and the company “owes” you because you lent them your investment. So, when young, bonds are a great way to go if you have time and money to be risky with. As people age and require more security, they can substitute the investment in bonds for the security of stocks. Not that either are 100% secure.

Is that accurate or false??? Thanks in advance...

Answer 1

Bond prices often decline as a result of lower interest rates. For example, if bond interest rates fall from 5% to 4% on a $1000 coupon bond, the bondholder will only recieve $40 per year versus the previous $50. As a result, the 4% bond is not worth as much as the 5% bonds so the price of bonds, when interest rates decline, go down.

As a result of lower interest rates (and bond prices going down), stocks seem more attractive to investors because they can offer a greater return. When more people are investing in stocks, companies have more money to spend on various things (expansion, new product production, etc.) so their prices often will rise. Also, with more people investing in stocks, demand for certain stocks increases causing prices to rise in order to regulate supply and demand (the higher the price goes, the less people want to buy a certain stock/product/good and vise versa)

Remember this phrase: "When interest rates rise, stocks die. When interest rates fall, stocks have a ball." Cheesy, I know... but it helps!

Also, as for the riskiness of bonds and stocks, generally, it is better to invest in "riskier" investments like stocks when you are young. Investing in stocks is a long-term process and the longer you are invested in stock, the greater your potential return. As you age, you should consider reallocating some of your assets into bonds because they tend to be much safer and offer more stable income for retirement.

Stocks are more risky than bonds because when a corporation defaults, its creditors such as bondholders get paid long before its stockholders. Also, investing in securities like U.S. Treasury bonds is considered "risk-free" investing because it is not likely the U.S. government will default on its debt obligations.

Answer 2

1

Answer 3

Hey there,
Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share. They are notoriously risky but if you follow a special method I've learned you can earn good money at almost no risk. This is the site I use: http://pennystocks.toptips.org

I definitely recommend subscribing to this site in particular. Very good research, quality stocks. I was a bit weary of penny stocks from all the bad hype they receive but this guy is pretty legit. He's put my mind at ease with a lot of the fears I've had. I especially like that he doesn't send out announcements left and right. I've signed up for other websites that fill my in-box with one company after the other. I don't know where to even start with so many choices in front of me! Nathan sends me one idea a week and that's all I need. Working so many hours during the week leaves me with very little time when I get home to start doing tons of penny stock research. I'm always eager to see what Nathan's next suggestion is each Friday and I love having time on the weekend to do my research.

As said above if you want to make money with penny stocks you have to follow some proven methods. This one in my opinion is the best: http://pennystocks.toptips.org

Answer 4

Sometimes they (investors) overvalue the price of the stock or believe that something is more valuable than it really is. In the case of Black Tuesday, stock prices and the Dow Jones Industrial Average had gone up a lot over the 1920s. Everyone knows the 1920s as the Roaring Twenties... things were good for America and the American people. Wall Street people were getting rich and living the high life. Stock prices were going up and up because the logic was: Things are going well in the economy, so the economy/market can sustain the high stock prices. Well, that turned out to not be the case. Some people started doubting and then a lot of people started doubting and they wanted to get their money out of the stock market. So there was a rush of people all trying to sell their stocks so they could get their money out of the stock market. When everyone is rushing to get out, no one is buying and the value of the stocks plummet. Make no mistake about it though Black Tuesday was a big day, but the weeks leading up to it, the market was still very unstable, lots of mass selling and mass buying. As for money: most money these days is fiat currency. That means it's just paper and doesn't have any real value. It has value because the Federal Reserve and the US Government says it is one dollars or twenty dollars and they (sort of) control the amount of paper money floating around in the economy. And the market determines just how much the dollars are worth. The Federal Reserve can basically 'print money'. In a free market like the United States, if the Federal Reserve just prints and prints money for a while, prices will go up. Because you will have people with more money that want to buy a limited supply of food, shelter, flat screen TVs, etc... Think of it like this: paper money is always used to buy stuff. There is a limited amount of stuff in the economy. If the Federal Reserve prints more paper money and puts it into circulation, the amount of stuff does not change. So there is more paper money that people want to use to buy the same amount of stuff. Prices will go up in a free market because there is literally more paper money that people are trying to use to buy the same amount of stuff. You have to stop thinking of money as having value on its own. Instead of a farmer trading corn to an autoworker for a car, money is used as a go-between. So a farmer sells his corn in the market and gets money, he uses that money to buy a car. The autoworker makes cars and uses his salary to buy corn, food, etc... The reason the money has a value and can be used as a go-between is because the government and the Federal Reserve only allow a certain amount to be in the economy.

Answer 5

They can be either substitutes or complements. When people are fleeing risk in the equities markets, they often run toward Treasury securities. When people make 401(k) deposits, they often do so in a balanced manner and so are complements.

Bonds and stocks bear different types of risks. With bonds you are promised the return of your principal, you are not promised that money you reinvest when sent will get a comparable rate of return. So the primary risk with bonds is long term income risk. With stocks, you are not promised anything, though dividends tend to persist. Since, on average, dividends tend to rise approximately with inflation, your income is pretty much insured in terms of maintaining value, but your principal is all over the board in terms of value.

If you are young, a careful plan of purchasing equities is prudent. As you age, since you are more likely medical money and so forth so bonds should complement your portfolio.

Answer 6

supply and demand much like any commodity. the prices of bonds declines because more people are buying stocks and also interest rates are falling, which lowers the yield on bonds while raising their prices