Stock Market Info :: Stocks vs Bonds

Stock vs Bonds

A common question today among investors is, what is the difference between a stock and a bond? A stock is a certificate that certifies that you own part of the company you’ve invested in.

Every time you buy another security, you increase your ownership in that company. Therefore, you have an active stake in how well the company performers.

A bond, on the other hand, is merely the issuance of debt to raise money for the company. For instance, if a company needs money to buy new equipment to begin manufacturing a new product, they will need to raise money to acquire the needed capital.

They often times do this by issuing bonds to bondholders, with the agreement they will pay them back in interest in a certain time. Therefore, when you buy a certain companies bond, you essentially lend that company money for them to use on whatever they want, with the understand they will pay you back with interest on a certain date.

Generally speaking, stocks have a much greater income potential because you actually have a stake in how well the company performs. For instance, if the company’s profits rise 20% in an annual years, your stock price will most likely rise on a similar plane.

However, if you merely hold a bond of the company, you don’t any piece of that pie; all you are entitled to is the interest you agreed to at the end of the period. Of course, bonds also have considerably less risk than stocks, because you don’t stand to lose if the company doesn’t do well financially.

Therefore, whenever you are considering investing in a certain company, you need to take it on a case by case basis.

For instance, a company may be on relative shaky ground financially, so you wouldn’t want to invest in their stock.

However, they may have a very reliable track record of paying their bonds back; if this is the case, you will obviously opt for the bond. Therefore, you need to make each decision on a case by case basis when comparing stocks vs bonds.