The Difference Between
Stocks and Bonds
One of the most common questions we get is, “What’s the difference between stocks and bonds?”
The short answer is that when you buy stocks in a company, you’re becoming a (part) owner of that company. But when you buy bonds, you are buying at least a portion of the debt of that company.
Ownership is equity. Stocks are equities.
A publicly traded company like Apple sells its shares to the public, which includes individual investors, and institutional investors. When you purchase stock in a company, that company receives your cash, or your investment, to put towards the business in some way. As a shareholder, you are part of the ownership of the company.
As the company grows and succeeds, it makes a profit, and depending on the market’s perceptions of the company’s performance, shares will likely increase in value to varied degrees. If the company fails to meet its goals and falls short of analyst and the market’s expectations, shares decline in value.
Share prices often change on news of company performance, industry factors, operating environment factors, economic news, and customer news.
Bonds, on the other hand, are different. When you purchase a bond, you’re essentially purchasing a debt, and you are lending the company (or in the case of government bonds, the government) money.
When you buy bonds, you are not investing specifically in the company. You are not an owner or a shareholder.
You are more like a ‘banker’ or creditor because you are giving the company money, and the company is obligated to pay you back with interest. Bond interest is described as a “coupon.” Coupons are paid at an established rate and schedule.
Bonds come with maturity dates, which is the date where the issuer of the bond is required to repay what they borrowed. As an investor, you are not bound to hold your investment until the designated date. You can sell your bond before the maturity date.
Because bonds offer a certain degree of predictability, they are referred to as fixed-income securities.