What Is The Difference Between Stocks And Bonds?



Deciding where to invest your hard earned capital can be the biggest challenge facing investors.  For many investors, it will require a lot of planning and risk assessment, as certain types of investment instruments will carry higher risks with potentially higher rewards.

When learning the difference between stocks and bonds it is important to first take a look at what stocks and a bonds are.  There are distinct advantages and disadvantages to both types of investment instruments, and the pros and cons should be weighed carefully.

Stocks

Stocks have traditionally been a way for investors to realize profits from owning a portion of a company without having to participate in the day-to-day operations of the corporation.

If you own stock in a particular company, you own a portion of that company. It might only be a very small portion, but you still own it. If a company pays a dividend, as a stock holder you will receive a dividend payment, the amount will be determined by how many shares you own in the company.

With any stock investment, the value of a stock can always go down as well as up. If the company performs well, the stock is likely to go up. If the company performs badly the stock is likely to go down. In the event of a company going bankrupt, you can  potentially lose your entire investment.

This fact is why many people are fearful of investing in stocks.  There is always the underlying risk of losing 100% of your invested capital when investing in a company’s stock.  While there is no such thing as a “sure thing” in the stock market, there are steps investors can take to mitigate their risks, while realizing profits greater than what can be found in traditional bank savings accounts, CDs, or government bonds.

Bonds

A bond is a loan made to a company or government. Anybody can buy a US Treasury bond and get a “guaranteed” return. This type of bond is probably as safe as you can get, the US government has never defaulted on a bond, though nothing is impossible.

If you lend money to a company or a less secure government, you are likely to get a higher rate of return, but there is a higher risk of company or government defaulting.

An added benefit to owning a company’s bond, versus purchasing stock in a company is that bond holders are paid first in the event of a company’s demise, making these investment instruments slightly “safer” than purchasing shares of a company.  Keep in mind that there are still risks associated with corporate bonds, including the risk of loss of capital.

Stocks and Bonds Information

The main differences are:

  • A bond is a loan, a stock is equity in a company
  • Stockholders are subjected to volatility of the company’s stock, bond holders are not
  • In the even of bankruptcy, bond holders get paid BEFORE stock holders
  • Stockholders may be entitled to dividends, bond holders never are, as they don’t own any equity in the company.

Where to buy stocks and bonds?

Most bonds and stocks can be purchased from any major stock broker such as zecco.  Your choice of brokers will depend on may factors, and should be carefully considered. To see a more detailed list of stock brokers, feel free to visit my stock broker comparison page.




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