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Understanding Volatility
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Because bonds are senior in the capital structure, they tend to be less volatile than stocks.  Bond owners are mainly concerned with whether or not the government or company has enough revenue to pay them back.

Changes in bond prices are usually due to changes in interest rates and credit quality.

As a result bonds often trade like...

But as long as you hold the bond to maturity, assuming the borrower is still around, you get your money back.

 

On the other hand, the stock market is manic-depressive.  Strongly motivated by fear and greed, stock investors consistently over-react to short-term news.  Over the long term it's earnings that drive stock prices.  Stock owners want to know their company is profitable.  It is by growing profits that companies increase in value over time.

So stocks trade like...

  

 

    

 <NEXT:  Let's talk about speculation>

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