Bonds vs. Stocks: An Introduction
While stocks and bonds are frequently grouped when discussing investments, their risks, returns, and behaviors are markedly different.
The investing information on this page is offered solely for educational purposes.
How are stocks and bonds different?
Stocks entitle you to a corporation’s portion, whereas bonds entitle you to borrow from a company or government. The primary distinction between them is how they earn money: stocks must rise in value and then be sold on the stock market, whereas most bonds pay a fixed interest rate over time.
Stocks reflect a company’s half ownership or equity. When you purchase stock, you buy a fraction of the company – one or more “shares.”
Now consider that the company regularly performs well over several years. Because you own a portion of the firm, its success is also your success, and the value of your shares will increase in lockstep with the company’s worth.
Naturally, the converse is also true. If the firm performs poorly, the value of your shares may decline below the price at which you purchased them. In this case, selling them would result in a loss of money.
Equity securities and equity shares are other names for stocks.
Company shares can be issued to the public for many purposes, including future growth capital.
Bonds are a sort of company or government loan. There is no equity and no stock to buy. A firm or government promises to pay you interest on a loan for some time before repaying you the full amount you paid for the bond. But bonds aren’t risk-free. If the company declares bankruptcy during the bond’s term, you may not get your entire capital back.
Assume you purchase a bond for $5,000 that pays 1% annual interest for ten years. That implies you’d receive $50 in interest payments each year, typically evenly spread throughout the year. After ten years, you will have earned $500 in interest and recouped your initial investment of $5,000. Keeping a bond till maturity is referred to as “holding until maturity.”
With bonds, you typically know what you’re getting into, and the regular interest payments can be used to provide predictable fixed income over an extended time.
The bond period varies according to the type purchased but typically ranges from a few days to 30 years. Similarly, the interest rate — yield — will fluctuate according to the bond’s type and length.