Stocks vs Bonds

Differences Between Stocks vs Bonds

Stocks vs Bonds – In this article, we shall understand the importance of Stocks and Bonds and the differences between them.

Stocks and Bonds 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 towards the capital of the company can have a share if it is available to the general public.

Bonds are actually loans which 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.

Stocks vs Bonds Infographics

Below are top differences between stocks vs bonds in infographics format.

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Stocks vs Bonds – Key differences

Top differences between stocks and bonds are listed below –

1. 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.
2. Stocks are treated as equity instruments whereas bonds are debt instruments.
3. Stocks are issued by various companies whereas Bonds are issued by Corporates, Government institutions, Financial institutions etc.
4. The returns on stocks are dividends which 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 which 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.
5. 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.
6. 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.
7. 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)
8. 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 (Comparison Table)

The basis of Comparison between Bonds vs Stocks	STOCKS	BONDS
Meaning	These are instruments which highlight the interest of ownership issued by the company in exchange for funds.	Financial instrument which 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	Interest which is a fixed payment
Additional benefit	Holders get the Right to Vote	Preference in terms of repayment and also on liquidation.
Market	Centralised/Stock Market	OTC (Over the Counter)

Conclusion

Both stocks and bonds are known 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 appetite 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 a been a guide to the top differences between bonds vs stocks. Here we also discuss the stocks and bonds differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in corporate finance –

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