What Is the Difference Between Stock Shares and Bonds?

Stock is ownership, while bonds are a form of loan.

A share of stock is a share of ownership in a corporation, while a bond is a technically a loan made to a corporation or government for a fixed rate of return.

Stocks

When an investor buys a share of stock, he buys a fraction of ownership in the corporation. Many corporations offer different classes of stock, with different rights and privileges. Common stock, for instance, offers the shareholder the right to vote on the corporation's board of directors and receive dividends in proportion to the company's profits.

Bonds

In contrast to stock, a bond is really a loan. The corporation gives the investor the bond in return for capital, but it must pay back the principal at a predetermined maturity date, and typically must make periodic interest payments to the investor. Bondholders usually do not receive any rights in corporate operations beyond the repayment of the bond. Governments may also issue bonds, which operate in a similar fashion.

Liquidation Priority

Bondholders generally have superior rights to shareholders in liquidation. Should a corporation liquidate, the bondholders' investment is repaid first, along with that of other company creditors. If any money remains, the company then repays its shareholders.

References

• "Securities Regulation, Cases and Materials, Eleventh Edition"; Coffee, John C. and Hillary A. Sale; Foundation Press; 2009
• VirtEd.org: Stocks and Bonds
• Russell Investments: Stocks and Bonds

Resources

• SEC.gov: Investor Products--Your Choices: Stocks and Bonds