Difference Between Stocks & Bonds

by Allen Young ; Updated July 27, 2017
Difference Between Stocks & Bonds

There are several ways to invest in a company. The most common way is to buy stock. In this way, you own part of the company, although your interest can be very small. Another option is to buy a bond issued by the company. A bond owner does not have ownership in the company; the company owes him money and the bond holder is a creditor.

Features

A stock represents partial ownership or equity in a company. A bond represents a debt obligation of the company.

Benefits

The benefits of investing in stock is that the shareholder shares in the success of the company. The benefits of investing in bonds issued by the company is that you will receive income secured by the assets of the company.

Risks

In the event of bankruptcy, the bondholders are paid before the shareholders are. Shareholders have a greater risk, as they may not receive anything after the other creditors are paid--but they also stand to make much more than the bondholders if the company prospers.

Misconceptions

It is a misconception to say that the bond holders have very little risk as opposed to the shareholders. A bond can lose its value and default just as quickly as a stock. Often, the bond market is just as volatile as the stock market.

Time Frame

The investing time frame for a shareholder varies--they can easily sell at any time on the stock market. A bond holder generally holds the bond until it matures and his principal is returned with interest. A bond holder may sell early, but risks getting less than his original investment if the bond is sold before maturity.

About the Author

Allen Young is an experienced writer on such subjects such as real estate investing, mortgages, and personal finance. Young has also written on sports, travel, and parenting. Currently he is the president of Crestwood Capital Group.

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