Bonds vs Stocks – Know the Difference Between Shares & Bonds
What are shares and bonds
Stocks or a share of capital stock is an equity instrument carrying ownership interest in a corporation. Anyone who is willing to contribute towards the capital of the company can buy a share if it is available to the general public.
On the other hand, bonds are actually loans that are secured by a specific physical asset that highlights the amount of debt taken with a promise to pay the principal amount in the future and periodically offering them the yields at a predefined percentage.
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Categories of stocks and bonds:
- Stock
- Stocks by size
- Stocks by sector
- Stocks by growth
- Stocks by region
- Index funds
- Bonds
- Government bonds
- Municipal bonds
- Corporate bonds
- Zero-coupon bonds
Bonds Vs Shares
Let us learn in detail about the differences between shares and bonds from the table below:
| Basis of comparison | Bonds | Stocks |
|---|---|---|
| Meaning | Bonds are financial instruments that highlight the debt taken of the issuing body towards the holders and a promise to pay back at a later stage with interest | Stocks are instruments that highlight the interest of ownership issued by the company in exchange for funds |
| Issuers | Govt. institutions, financial institutions, companies, etc. | Corporates |
| Status | Holders are the lenders to the firm | Stockholders are the owners of the company or firm |
| Risk Levels | Relatively low | High |
| Form of Return | Interest, as a fixed payment | Dividend, which is not guaranteed |
| Additional benefit | Liquidation and preference in terms of repayment | Shareholders get voting rights |
| Market | Over the Counter | Centralized/Stock Market |
| Type of investment | Debt | Equity |
| Time of maturity | Fixed at the time of purchase | Depends on investors |
| Owners | Bondholders | Stockholders |
| Participants | Investors, speculators, institutional investors | Market maker, floor trader, floor broker |
| No. of Types | 12 | 4 |
What is stock market and bond market?
The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds, which may be issued by corporations or governments. It is also known as the debt market or the credit market. There are three main groups involved in the bond market which include:
- Issuers
- Underwriters
- Participants
Stock market is a place wherein investors go for trading of securities like equities, derivatives, options, and futures. Stocks are traded on stock exchanges. Buying equity shares means you are buying an ownership stake in a company.
The main differences between the stock and bond market are:
- The risk involved in investing: When it comes to stocks, investors may be exposed to risks such as country or geopolitical risk, currency risk, liquidity risk, interest rate risks, which can affect a company’s debt, the cash on hand, and its bottom line. But, when it comes to bonds, it is more are more susceptible to risks such as inflation and interest rates.
- Voting rights: The shareholders can vote on certain company issues such as the election of directors whereas bondholders have no voting rights.
- The priority of repayment: During the liquidation of a business, the shareholders have the last claim on any residual cash whereas the bondholders have a considerably higher priority which depends on the terms of the bonds. Therefore, it justifies that stocks are a riskier investment than bonds.
- Periodic payments: Companies have the option to reward their shareholders with dividends whereas for bondholders it is usually obligated to make periodic interest payments for a specific amount. Various agreements of bonds allow their issuers to delay or cancel interest payments, but this is not a common feature.
The above mentioned points clearly differentiate between the two: bond market vs stock market.
How are stocks and bonds valued?
The price of a stock is determined by what buyers and sellers are willing to pay or accept on any given day on the exchange. Whereas, with bonds, the prices are determined based on how rating companies like S&P and Fitch rate the creditworthiness of the issuer of the bond.
Should you own shares or bonds?
An investor’s allocation between shares and bonds depends on a number of factors including time horizon, income requirements, and risk tolerance. But, when it comes to investing a question arises what to buy among the following: stocks bonds and mutual funds. Both stocks and bonds are financial instruments and are utilized by retail and institutional clients to park funds with an expectation of getting higher returns. Both can be used for making short term gains or can be used for the long term as an investment. Bonds issued by the government are extensively used and also helps to depict the financial stability of the country. While constructing a portfolio an investor should consider both shares as well as bonds to enhance the possibility of returns.
