Differences Between Stocks and Bonds
A stock represents a collection of shares in a company which is entitled to receive a fixed amount of dividend at the end of relevant financial year which are mostly called as Equity of the company, whereas bonds term is associated with debt raised by the company from outsiders which carry a fixed ratio of return each year and can be earned as they are generally for a fixed period of time
They are used for making quick money or even from the perspective of keeping its investments since the prospects of growing money are relatively higher in this case. Other macroeconomic factors also have an impact on the performance of these stocks or bonds which also needs to be kept in mind.
A stock indicates owning a share in a Corporation representing a piece of the Firm’s assets or earnings. Any person who is willing to make a contribution to the capitalContribution To The CapitalContributed capital is the amount that shareholders have given to the company for buying their stake and is recorded in the books of accounts as the common stock and additional paid-in capital under the equity section of the company’s balance sheet.read more of the company can have a share if it is available to the general public.
Bonds are actually loans that are secured by a specific physical asset. 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 a pre-decided percentage.
In this article, we shall understand the importance of Stocks vs Bonds and the differences between them.
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Stocks vs Bonds Infographics
Let’s see the top differences between stocks vs bonds.
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Key Differences
- A stock is a financial instrument issued by a company depicting the right of ownership in return for funds provided as equity. A bond is a financial instrument issued for raising an additional amount of capital. These are issued by government agencies and also by private organizations offering periodic interest payment and principal re-payment at the completion of the duration.
- Stocks are treated as equity instruments whereas bonds are debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.read more.
- Stocks are issued by various companies whereas Bonds are issued by corporates, government institutions, financial institutions, etc.
- The returns on stocks are dividends that are not guaranteed and depend on the performance of the company. Despite making substantial profits, if the board of directors is of the opinion to deploy profits elsewhere instead of distributing a dividend, such decisions cannot be questioned. On the other hand, bonds have fixed returns that have to be paid irrespective of the performance of the borrower since it is a debt amount. Thus, there is a guarantee of returning the amount in bonds.
- Stockholders are considered as the owners of the companies and are given preference in terms of voting rights on important matters. Bondholders are creditors to the company and do not get voting rights.
- The risk factor is high in stocks since the returns are not fixed or proportional whereas bonds have fixed returns making it less risky. Bonds are also rated by credit rating agencies which make it more structured before considering the investment opportunity.
- The stock market has a secondary market in place ensuring centralized trading as opposed to bonds in which trading is done Over the Counter (OTC).
- Stockholders may have to pay DDT (Dividend distribution tax) in case of the returns received which can further curtail the returns received but bonds are not exposed to such tax burdens.
Stocks vs Bonds Comparative Table
| Basis of Comparison | Stocks | Bonds | ||
| Meaning | These are instruments that highlight the interest of ownership issued by the company in exchange for funds. | A financial instrument that highlights the debt taken of the issuing body towards the holders and a promise to pay back at a later stage with interest. | ||
| Issuers | Corporates | Government institutions, Financial institutions, Companies etc. | ||
| Status | Stockholders are the owners of the company | Lenders to the firm | ||
| Risk Levels | High since it depends on the performance of the issuer | Relatively low since bondholders are prioritized for repayment. | ||
| Form of Return | Dividend but not guaranteed | The interest which is a fixed payment | ||
| Additional benefit | Holders get the Right to Vote | Preference in terms of repayment and also on liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more. | ||
| Market | Centralized/Stock Market | OTC (Over the Counter)Over The Counter)Over the counter (OTC) is the process of stock trading for the companies that don't hold a place on formal exchange listings. The broker-dealer network facilitates such decentralized trading of derivatives, equity and debt instruments.read more |
Conclusion
Both are known as the forms of financial instruments and utilized by retail and institutional clients to park their funds with expectations of getting higher returns. Though these avenues can be used for making short-term gains and close out the trade, many are also holding onto them in the long run as a form of investment.
Bonds issued by the government are extensively used and also depicts the financial stability of the country. If the yields offered are less it means the nation is in a good position to pay off its debt and does not need everyone to lend to them and vice-versa.
In the end, it depends on the investment objective and risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more of the investors and how long are they willing to part away with their funds. When constructing a portfolio as well either or both these instruments can be included to enhance the possibility of returns.
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This has been a guide to Stocks vs Bonds. Here we discuss the top differences between stocks and bonds along with infographics and comparative table. You may also have a look at the following articles for gaining further knowledge in corporate finance –
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