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Lesson 2. Why You Should Invest in Stocks > Stocks vs. Cash - Pg. 11

Why You Should Invest in Stocks 11 Please be aware that the "no limit" policy on a stock's growth is a Catch-22. Because no limit is placed on how large the investment can grow, no limit can likewise be placed on how small the investment may shrink. As a result, the single biggest factor that makes a bond a more desirable investment is its guarantee of capital preservation. This means that when lending your money to a company through the purchase of a bond, you may make less profit, but you are assured of getting back at least the original amount you paid to purchase the bond. Stocks make no such guarantee. Caution Stocks have the potential to provide higher returns than bonds; however, bonds offer a higher degree of security for the principal amount invested. In the very unlikely case that the issuing company of either a stock or a bond should go out of business, all bond holders would be paid first from the liquidation of the company's remaining assets. This gives bondholders a minimal edge over stockholders in recovering their initial investment. Remember, however, that the most fundamental reason for any investment is to make money. By providing an investment with the necessary flexibility to make larger gains, it becomes capable of making equally large losses. This concept is known as "risk and reward." With stock it is possible to get the best of both worlds: the safety of bonds with the profit potential of stocks. Investments in solid companies, such as IBM or McDonald's for example, carry little if any practical risk of going defunct anytime soon. Stocks vs. Cash Cash, in financial terms, refers to any type of investment that is extremely liquid. A money market account, for example, is considered cash because the account holder can withdraw his or her money with relative ease, including drawing on the account with a personal check. Cash can also refer to