The two key types of assets used in the portfolios are stocks and bonds. Stocks represent an equity interest in a business, while bonds are equivalent to debt to a business or other entity.
When an individual purchases stock from a company, it means the individual partly becomes the owner of the company and in the case of bonds no ownership is created
Bond is a fixed income asset in which a lender owes money to an organization that collects the funds for a specific amount of time at a variable or fixed interest rate. Bonds are used by businesses, corporations, nations, and governments to collect capital to fund a wide range of programs and activities. The holders of the bond become the debt holders or bondholders of the lender.
Stocks vs Bonds
The main difference between Stocks and Bonds is their ways to generate funds. Stocks are the equity investments, whereas bonds are the conservation against debts. Stocks are retainable by owners (stockholders) of the firm. Contrarily, lenders (such as banks) acquire the bonds of the firm. Though holding stocks is riskier than off bonds.
Comparison Table Between Stocks and Bonds (in Tabular Form)
| Parameter of Comparison | Stocks | Bonds |
|---|---|---|
| Meaning | A part of ownership in the company which entitles a right in profit only for the part-owned by purchasing shares of the company is known to be stock | Loan granted by any individual to an organization, company, entity, etc. for a specified period at a fixed rate of return |
| Type of Right | Securities | Debt |
| Key Person -Owner | Stock Holder/Share Holder | Bond Holder |
| Returns | Profits | Interest |
| Voting Rights | Yes | No |
What are Stocks?
Businesses sell stocks to raise funds to run their companies. A stockholder has now purchased one portion of the company and can claim a portion of its assets and profits, based on the type of stock kept.
In other words, the owner of the issuing company is now the shareholder. The amount of stock that an individual owns about the number of outstanding shares shall be established for ownership.
For instance, if you are buying stock from a company for $1 and the company’s total value is $100 you are said to be the owner of the company for 1% of its total value and entitled to profits for the 1% of shares held.
After the purchase of stocks if the price of the stock goes as a result of an increase in the company’s value the purchaser can sell it and earn profits out of it.
Unless sold, the person can receive revenue on the number of shares held in respect of the company’s profits at a fixed interval (i.e. quarterly, half-yearly, annually) in the form of a dividend.
Usually, there are two types of stock viz. Common Stock and Preferred Stock. The major portion of the stocks in the market was issued in Common Stocks.
Common stock yields higher returns than just about any other income through capital growth. This greater yield is affordable because common stocks involve the most risk. Preferred stock does not have the same voting rights as common shares.
One bonus of preferred stocks being that preferred stocks are paid first to common stock in the case of liquidation and that it is, therefore, more debt than equity.
What are Bonds?
This is perhaps the most popular form of security and a debt mechanism that periodically makes fixed-interest payments and charges the principal sum to maturity rates.
Bonds issued by companies, governments, joint ventures, etc to fund different ventures. Bonds are usually issued for a specific time and the issuer returns the debt to the investor when the bond expires.
When the first bond issued its value is the sum borrowed called the face value and the investor receives a guaranteed income called a coupon in return.
Risk in a bond is based on the issuer’s creditworthiness and not on market fluctuations. Investor bonds are available in several different categories. Two notable categories are discussed below.
Zero-Coupon Bonds are reduced in the price of their nominal value to generate a return until the full face value of the bond is paid at the maturity of the bond.
A convertible bond is a form of fixed-income debt that offers interest paid but can be transformed into the specified number of Equity shares. At certain stages of the life of the bond, the holder can convert bonds to stocks.
While buying a bond a person should look into a few important factors viz. Duration, amount of expense it requires, Creditworthiness of the issuer, Rate of Return, previous records of the issuer about bonds.
The downside of stocks versus bonds is that stocks are not guaranteed to give the investor anything, and bonds typically produce relatively reliable returns through coupon payments. Stocks have a greater potential for high returns nevertheless, capital may be lost.
Main Differences Between Stocks and Bonds
- A company, entity, organization, etc can raise money for function by two main ways (i.e.: selling or borrowing) Stocks are selling off shares of the company while borrowing of debts from various investors by issuing bonds.
- Risk: In the case of Stock the risk is comparatively higher than bonds as earnings in stock are mainly based on the liquidity of the company but in bonds, the risk is high to the issuer of the bond
- Stockholders have the right to vote in the cases of electing directors and managerial decisions related to the company whereas bondholders are debtors who don’t have voting rights
- The returns in Stock are dividend which is paid at a fixed interval time based on the company’s earnings and the number of stocks owned by the holder. The returns on the bond interest which are fixed as the interest rate rarely changes and on the maturity of the bonds the issuer of the bond has to repay the principal.
- When liquidation occurs priority of stocks is at the bottom of the scale whereas bonds are paid before stocks.
Conclusion
Both Stock and bond are investments that generate income stocks which have a higher possibility of earnings and also higher risk while bonds are a standard source of income for a stipulated time which is a secured income and it always depends on the investor to choose between two.
References
- https://academic.oup.com/rfs/article-abstract/24/11/3731/1589752
- https://www.nber.org/papers/w2047