Equities

Equities (stocks) have greater risk than bonds because they represent the residual interest in a company after all other claims are paid. If a company goes bankrupt, short-term creditors such as employees and suppliers are first to be paid, followed by banks and other lenders, and only after those claims are settled are equity investors (owners) compensated. Given that there is greater risk, investors need an incentive to invest in equities.

This incentive comes in the form of higher returns. According to a study done by Dimson, Marsh and Staunton equity returns were higher than bond returns in each of the 17 countries studied over the 106-year period of the study.