How Are Bonds And Stocks Different?

Stocks and bonds while often used together when speaking in terms of investment tools, vary greatly in their use and function. A stock, also called an equity, is an actual piece of ownership in the company or entity who issues the stock. You purchase the stock and in essence you own a little portion of the company. In the case of a bond, you do not possess any equity or have any ownership of the company or entity from which you purchased the bond. The bond simply is a sort of loan you are making to the bond issuer. They promise you a specified amount of money on a specified date, the maturity date, and you give them the money up front. When the date is up, the money is returned to you plus the maturity, or interest amount. The amount of interest you will earn with a bond is clearly stated on the bond and will not rise or fall based on the bond issuers performance. The money made, or interest on the bond, is determined by subtracting the bond maturity price from the purchase price of the bond, referred to as the discount price.

Stock Risk And Bond Risk

In all investments across the board, risk is inherent. There is no institution or company that can guarantee you your money back plus interest. There do exist, however, varying levels of risk while investing. Within stocks themselves, there are varying degrees of risk when investing in companies. Some stocks are normal investments. You buy a stake in a company and hope they do well. As the company increases in value, so does the stock you own in them. Other stock investments entail investing in funds, generally seen as more secure as they carry many securities from many companies to help negate losses from single stock plung. When speaking in bonds, the security level increases substantially. This is due to many aspects but most significantly it is based on how you are investing: using a bond. Most bonds are government issued. While the rates of return are not fantastically high on these bond investments, they are as close to guaranteed as you will find in the market. Even non-government bonds are less risky than buying equity shares in a given company. This is because you are entering into a contract, essentially a loan contract, with the company for a specified amount. You are not gambling on their income or performance. The amount is said and they are obligated to pay you back regardless of their share performance.

How Are Bonds And Stocks Different?

Stocks Versus Bonds

Stock Risk And Bond Risk

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