Difference Between Stocks and Bonds

Stocks vs. Bonds

Stocks vs Bonds: Stocks and bonds are two of the most traded items and each is available for sale on different platforms or through a variety of markets. Stocks are shares, known as equity, in a publicly traded company. A single share of stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from the liquidation of assets. On the other hand, bonds are basically a fixed income loan an investor makes to the government or corporate entity. They are loans which are secured by a specific physical asset, and it highlights the amount of debt taken with a promise to pay the principal amount in the future and periodically offering them the yields at agreed percentage. Below are some of the differences between stocks and bonds:

What is the difference between Stocks and Bonds?

  1. Market: The stock market has a secondary market in place ensuring centralized trading as opposed to bonds in which trading is done over the counter.
  2. Form of existence: Stocks are shares in ownership of a business, meaning that stockholders have an equity stake in the company while bonds are a form of debt that issuing entity promises to repay at some point in the future. Bondholders have a creditor stake in the company, that is, they are lenders.
  3. The priority of repayment: In the event of the liquidation of a business, the holders of its stock have the last claim on any residual cash, whereas the holders of its bonds have a considerably higher priority depending on the terms of the bonds. This means that stock is a riskier investment than bonds.
  4. Voting rights: The holders of stock can vote on certain company issues such as the election of directors because stockholders are considered as the owners of the companies and are given preference in terms of voting rights on such matters while bondholders have no voting rights because they act as creditors to the company.
  5. Periodic payments: A company has the option to reward its shareholders with dividends, whereas it is usually obligated to make periodic interest payments to its bondholders for very specific amounts. Some bond agreements allow their issuers to delay or cancel interest payments.
  6. Risk levels: The risk level is high in investing in stocks since the returns are not fixed or proportional, therefore thoughtful investment selections that meet one’s goals are acceptable at a given level to reduce uncertainties whereas risk level in the investment of bonds is relatively low since bondholders are prioritized for repayment with there are fixed returns.
  7. Format of return: The returns on stocks are dividends which are not guaranteed and depend on the performance of the company. On the other hand, bonds have fixed returns which have to be paid irrespective of the performance of the borrower since it is debt amount, thus, there is a guarantee of returning the amount in bonds.
  8. Market: The stock market has a secondary market in place ensuring centralized trading, where one can buy, sell and trade stocks any business day as opposed to bonds in which trading is done over the counter where participants can issue new debt or buy and sell debt securities.
  9. Issuance: Stocks are issued by various companies. The amount of issued stock is dependent on the authorized capital of a company or the maximum number of shares authorized by company’s corporate documents to issue to shareholders whereas bonds are issued by corporate, government institutions, and financial institutions whereby the investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payment at designed intervals.
  10. Tax payment: Stockholders may have to pay dividend distribution tax in case of the returns received which can farther curtail the returns received but bonds are not exposed to such tax burdens.

 

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