Compare & Contrast Stocks & Bonds
Stocks and bonds are both popular investment options, and most investors have at least some holdings in both securities. Investors buy both in an attempt to make profit as stocks or bonds increase in value or age, while businesses create stocks and bonds to increase their capital, the funds they have available for investment. Despite these similarities, stocks and bonds have several key differences that make them highly differentiated security options.
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Stocks
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Stocks are shares in company ownership. When an investor buys stock, the investor is literally buying a part of the company, which typically comes with specific voting rights, how slight they may be. A company increases capital through selling equity when it issues stock, and creates a dividend plan to pay all investors that own their shares. Dividend plans pay based on the performance of the company, and how much revenue the business wants to give shareholders versus how much it wants to invest in other projects.
Bonds
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Bonds are also issues by businesses (as well as governments), but they act more like loans than stocks do. A business creates capital through debt by issuing a series of bonds: the investors buy bonds for a certain price, and the bonds begin to mature, gaining interest at a specified rate. When the bond reaches maturity after a set number of years, the investor can collect the money owed from the business, along with all the interest the bond collected over that time. The company does not pay dividends on bonds, and the bond's investors do not own any part of the company.
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Trading
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Both stocks and bonds are traded actively, although stocks are often traded more quickly, and each has a separate market. Stocks are traded based on the interest of investors, who bid on stock they are interested in or make offers to sell stock they no longer want. This leads to frequent changes in stock value, especially if investors have a reason to be interested in a certain kind of stock. Bonds are traded based on the interest rates that show how much money they will earn. High interest rates make bonds more desirable, so investors can often sell them in a secondary market and gain immediate profit as well.
Risk
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Stocks and bonds both represent a certain amount of risk, but stocks are considered much more risky. They are based on the success of companies and the attitudes of investors, which frequently change with news, economic conditions and technology. This allows stocks to rapidly appreciate in market value, but also rapidly lose value. Bonds are more dependable, since their terms are set when they are created, and government bonds after often considered one of the least risky investments possible.
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