Difference between Stocks and Bonds : When you are a serious business professional, you are concerned about investments. Stocks and bonds are just two of the ways for you to raise your funds or expand your investment ventures.
What is the difference between stocks and bonds?
What are Stocks
Stocks represent an ownership claim in a company. When they are issued, the company is actually selling a piece of itself in exchange for cash, which they can use for expansion or upgrade.
For instance, if a does not have sufficient funds to expand their business, they then turn to the financial market in order to acquire additional funds.
The owners first divided the company into “shares of stocks”. Afterwards, a portion of these shares is sold to an open market.
The person who can buy them will then become part-owner of the company as he is actually buying an actual share of the company.
They usually pay dividends to the owners of the corporation or company. These dividends are a way to distribute the company’s profits among the owners.
Most companies and corporations prefer issuing stock than bonds. This is because issuers of bonds have the tendency to default if things will not go well as planned.
Large corporations trade on stock and bonds exchanges. Small corporations, on the contrary, never trade on exchanges. Their stocks and bonds are typically held by investors.
What are Bonds
Bonds are actually long-term debts in which the issuing entity agrees to pay the principal amount at a specified date.
It also comes with the agreement to pay interest for the use of the money loaned.
For instance, when a company, government corporation, or other entity needs to raise funds for whatever purpose. They can borrow money from the public market with a promise to pay subsequent interest of the loan to investors.
When the debt matures, the full principal amount is returned, unless the one who issued the bond is unable to make the payment, in which case the issuer is in default.
Bond, on the other hand, require the issuer to pay interest to the bondholders.
Difference between Stocks and Bonds
We can also say that there is a difference between stocks and bonds as to the respective risk involved with them. With stocks, it is often a risky business.
The company or corporation can either rise up or fall into bankruptcy and disappear altogether.
If you buy a stock and become part owner, you will greatly benefit if the company does really good in the market over time, but you will surely suffer a great deal once the company fails and the stocks go down.
With stocks, on the contrary, the risk is lesser as bonds are usually paid back in full upon maturity