Stocks vs Bonds – Difference Between Stocks and Bonds
Many people often wonder: “What is the difference between stocks and bonds?” Well, if you are an ardent follower of the stock exchange market, there are two terms that are recurring within that business ecosystem. It doesn’t matter if it is the New York Stock Exchange or the London Stock exchange, these terms are stocks and bonds. So stocks give a part of ownership in the organization to you. And bonds are a loan from a person to another organization.
Whatever the case, you have nothing to worry about as the difference between stock vs bond will be fully discussed in this well-researched guide. In accordance with our usual tradition, we will start by defining the terminologies, then contrast them in a table and finally come to a conclusion.
Definition of Stocks – So What Are Stocks?
Stocks are defined as a stake of ownership in a company that can be sold off for cash. It typically exists as proof of partial ownership of the organization. So, when you purchase it, it means you own a slice of it. This is regarded as one of the most common investments there is, and that is because according to history, people have made a lot of money from it.
However, there are some risks associated with it, just like other forms of investments. But with careful planning and knowledge, one can manage these risks. When a company issues stocks, they do so to raise capital to grow their business and hopefully make more profits in the future. Investors, depending on their inputs, are entitled to this profit.
Anybody who can afford it is eligible to purchase as much as possible. Before technology got so advanced, people had to search out the physical address and make an appointment with a broker to begin the process. However, these days, anyone can purchase it online.
Definition of Bonds – So What Are Bonds?
Bonds are defined as a financial expression of debt owed by an institution to a person with the intention of paying back with interest. It can be issued by a company, government, or any reputable organizational body that wishes to raise money to finance a project.
Comparing stocks vs bonds, one can see how they are similar because they are both legal methods used by verified organizations to raise funds for certain projects. However, in the case of the latter, there is usually a fixed interest rate and a period where the debtor is expected to pay up the full money owed as well as the interest (known as the coupon rate).
In the case of the former, the investor gets rewarded in the form of a dividend. This dividend, as the investor so wishes, can be reinvested or cashed out. This goes on for as long as the contract is on, or for as long as the company can afford if it eventually goes bankrupt.
Here is an important note that applies to bonds vs stocks – both of them are risky! However, this risk can be managed with in-depth research which needs to be carried out before agreeing to purchase any one of them. Despite that, there is no assurance that these forms of investments can bring expected rewards in the future.
What Is the Main Difference Between Stocks and Bonds?
The table below deals satisfactorily with the difference between bonds vs stocks. So, get ready to go through them.
|Basis for Comparison
|These are stakes in the ownership of a company. They can also be called shares or equities.
|These are debts payable by a company or government to investors because they owe these investors. They are always created when the company or government wants to finance a project.
|Given the amount of money that an investor can lose overnight, stocks have more risks.
|The risks associated with bonds are minimal.
|These are bought and sold on the floor of market exchanges. This means that they have central point for buying and selling them. For instance, the New York Stock Exchange.
|Basically, these are sold over the counter (OTC), so there is no central point for buying and selling them.
|History has shown that investors in stock are by far more likely to make more profit over a long period of time. This is often the case when a company’s stock keeps soaring.
|While there are lots of profits that investors stand to get from investing in bond, in the long term, it is nothing compared to what they get from investing in the other one.
|The profit made from this option can change based on the prevailing market situation.
|This works with percentage coupons and doesn’t rely on market, so it doesn’t change.
From the above, we have been able to identify the difference between bond and stock, which also helps you understand the subject. Now, we will now conclude with the guide below.
So What’s the Difference Between Stocks and Bonds? – Conclusion
Well, there is no gain saying that this guide has satisfactory answered the question of contrast. Given that you have read so far, we can say with certainty that you can see the great disparity between the stocks vs bonds. However, if you haven’t, just keep in mind that one difference between stocks and bonds is that the former are shares while the latter are debts, depending on whose point of view. To conclude this article, we will look at the pros and cons of the two alternatives.
- For many experts around the world, the major benefit of investing in stock is that it tends to produce more benefits over a long period of time. However, no company guarantees its investors that they will make huge profits because the market is very unstable.
- As far as demerit is concerned, its main disadvantage is the one we have already mentioned: that’s, there’s no guarantee of returns. Investors are expected to do some due diligence before investing their money in companies’ equities. Even if companies don’t guarantee investors interests, they work around the clock to ensure that their shares stay profitable.
How about bonds? Well, we will highlight its major pros and cons as well:
- The benefit of this option is that it has low risks as it has fixed rates – perhaps it is also known as a fixed-income investment. This means that when the economy recovers, it remains fairly stable. Consequently, many investors are likely to choose this option because it offers a reasonable degree of stability.
- On the other hand, the disadvantage associated with this is that there is no high earning potential – people don’t become millionaires overnight because they have invested in this area. Everyone knows what they will earn.
Another difference between stock vs bond is the method used to determine an investor’s interest. Not sure what we mean? Now, let’s roll up our sleeves and show you the practical application.
Here’s how it is calculated…
A company can sell 20,000 shares, and you decide to buy 500 shares. To determine how much equity you own in the company, you simply calculate: 500/2000 x 100% = 2.5%. This means that you own only 2.5% of the company’s equity. But then, the price of shares keeps fluctuating, meaning that it can go down or up sharply. Let’s say you bought your shares at $100 a share when the company went public. Then you want to sell your shares at a later date. Then you realize that the price of the shares has collapsed and is now selling at $70 a share. This simply means that your profit is: Selling Price – Cost Price. This means $(70-100) = -$30. Actually, you didn’t gain anything since you suffered a loss of -$30 for each share sold. Since you are at a loss, you cannot sell all 500 shares.
But how do stocks and bonds differ? We will clarify that now…
Let’s say that you have a fixed coupon that is set at 5% for $20,000 per value. This means that this rate remains the same for a long period of time. Based on this rate, you are entitled to:
5/100 x 20,000 = $1,000 interest as a bondholder. Even if the interest rate for the same company goes up or down, yours is already set at 5%, meaning that it doesn’t change. Overall, they are expressed as a percentage of the investment and remain unchanged regardless of what happens to the company.
To conclude this guide on stocks and bonds difference, it’s critical that we focus on risk. For many businessmen, risks is everything. While some investors may be tempted to focus on the interests they are likely to earn, they must bear in mind that equities carry lots of risks. This is particularly true because the market, like all other markets, is very unstable. In closing, please note that the aim of this article is to help you identify the disparity between the two concepts and not to give you some expert advice. Therefore, your best bet is to consult an expert for investment advice before making your final decision.