What is the difference between a bond and a stock?

Bonds

• Nature:
  
  
  • Debt Instrument: A bond is a loan made by an investor to a borrower (typically a corporation or government). The borrower agrees to pay back the principal along with interest (coupon payments) over a specified period.
  
  
  • Fixed Income: Bonds are considered fixed-income securities because they provide regular interest payments to investors.


• Ownership:
  
  
  • Creditor Relationship: Bondholders are creditors of the issuer. They do not have ownership rights in the company.


• Returns:
  
  
  • Interest Payments: Bondholders receive periodic interest payments (coupons) and the return of the bond’s face value (principal) at maturity.
  
  
  • Lower Potential Returns: Bonds generally offer lower returns compared to stocks, but they are also considered less risky.


• Risk:
  
  
  • Credit Risk: The risk that the issuer will default on its payments.
  
  
  • Interest Rate Risk: The risk that changes in interest rates will affect the bond’s market value.
  
  
  • Inflation Risk: The risk that inflation will erode the purchasing power of the bond’s interest payments and principal.


• Maturity:
  
  
  • Fixed Term: Bonds have a specific maturity date, at which point the principal is repaid to the bondholder.

Stocks

• Nature:
  
  
  • Equity Instrument: A stock represents ownership in a corporation. When an investor buys stock, they purchase a share of the company’s equity.
  
  
  • Variable Income: Stocks are considered variable-income securities because their returns can vary based on the company’s performance.


• Ownership:
  
  
  • Ownership Rights: Stockholders are partial owners of the company. They have voting rights and may receive dividends.


• Returns:
  
  
  • Dividends: Stockholders may receive dividends, which are a portion of the company’s profits distributed to shareholders.
  
  
  • Capital Gains: Investors can also earn returns through capital gains if they sell the stock for more than they paid for it.
  
  
  • Higher Potential Returns: Stocks generally offer higher potential returns compared to bonds, but they also carry higher risk.


• Risk:
  
  
  • Market Risk: The risk that the stock’s price will fluctuate due to market conditions.
  
  
  • Business Risk: The risk associated with the company’s performance and profitability.
  
  
  • Higher Volatility: Stocks are typically more volatile than bonds, leading to higher potential for both gains and losses.


• Maturity:
  
  
  • No Fixed Term: Stocks do not have a maturity date. Investors can hold them for as long as they wish.