Stocks vs Bonds

Stocks Vs Bonds Meaning

A stock represents a collection of shares in a company entitled to receive a fixed dividend at the end of the relevant financial year, mostly called the company's equity. In contrast, the bond term is associated with debt raised by the company from outsiders, which carry a fixed return ratio each year and can be earned as they are generally for a fixed period.

They are used for making quick money or even keeping their investments since the prospects of growing money are relatively higher in this case. However, other macroeconomic factors also impact the performance of these stocks or bonds, which also needs to be kept in mind.

Stocks Vs Bonds Explained

A stock indicates owning a share in a Corporation representing a piece of the firm's assets or earnings. Any person willing to contribution to the capital can have a share if it is available to the general public.

Bonds are 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 offers them the yields at a pre-decided percentage.

Both are known as 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 closing 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 depict the country's financial stability. If the yields offered are less, 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 they are willing to part away with their funds. When constructing a portfolio, either or both these instruments can be included to enhance the possibility of returns.

Stocks Vs Bonds Infographics

Let’s see the top differences between investing in stocks vs bonds stocks vs bonds.

Thus, the above chart shows clearly the differences in stocks vs bonds returns, risk and there importance.

Example

Let us assume an example where an investor invests in both stock and bonds. This helps him to diversify his investment so that the portfolio remain balanced. He invest in some shares of Company X Ltd, and also some bonds of the same company.
However, the company performance deteriorates slowly and a few year down the line, the stock prices fall drastically. So, here, the investor loses money that are invested in the stocks. Thus, he suffers heavy losses. But the part of his portfolio that are invested in bonds, continue to get the interests, providing him a regular income. Finally the company goes into liquidation. As a result, the investor gets back his investment in bonds but does not get anything from the stocks.
This proves that stock may give higher return but bonds a safe investment.

Key Differences

These fundamental differences highlight the stocks vs bonds returns, risk, and usefulness.

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 private organizations offering periodic interest payments and principal repayment after 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. Regarding return on bonds vs stocks the returns on stocks are dividends that are not guaranteed and depend on the company's performance. Despite making substantial profits, if the board of directors wishes 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 borrower's performance since it is a debt amount. Thus, there is a guarantee of returning the amount in bonds.
5. Stockholders are considered 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. Regarding the stocks vs bonds risk, the risk factor is high in stocks since the returns are not fixed or proportional, whereas bonds have fixed returns making them less risky. In addition, bonds are also rated by credit rating agencies, making them more structured before considering the investment opportunity.
7. The stock market has a secondary market in place, ensuring centralized trading instead of bonds in which trading is done Over the Counter (OTC).
8. Stockholders may have to pay DDT (Dividend distribution tax) in case the returns are received, further curtailing 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 liquidation.
Market	Centralized/Stock Market	OTC (Over the Counter)

Pros And Cons

Let us look at the pros and cons of stocks vs bonds risk and return.

Stocks
Pros –

1. It is suitable for investors who are ready to take more risk.
2. If stock analysis is correct, they have the capacity to earn excess returns.

Cons-

1. There is a chance of losing money, which implies risk is more.
2. Equity holders are the last ones to get paid if company is liquidated.
3. They are highly volatile.

Bonds

Pros-

1. Good for investors whose risk appetite is low.
2. They are sure to get their money back if the company is liquidated.
3. Bonds are less volatile than stocks.
4. It is a reliable source of income through coupon payments.

Cons

1. Not suitable for investors who want higher return.

2. There is no excess return.

Recommended Articles

This has been a guide to Stocks Vs Bonds meaning. We explain its key differences, and pros and cons along with a comparative table, infographics & example. You may also have a look at the following articles for gaining further knowledge in corporate finance –

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