The Difference Between Stocks and Bonds

Many people don’t understand the differences between stocks and bonds. It occurred to me recently that even those who invest in these types of securities through either personal investment accounts or retirement plans can’t really articulate what the differences are. I’ve noticed that people have a general idea- such as associating stocks more with risk and bonds more with safety, but that’s about the extent of it. While both are types of investments which can earn you money, they are different as night and day in terms of the potential risks and rewards.

When you buy a share of stock, you are actually taking ownership in the company in which you are investing. For example, consider the hypothetical example of Russell’s Fast Food Palace. If it were a publicly traded company divided into 1 million shares and you bought 1,000 of them, you’d be a .001% shareholder of the Fast Food Palace. As a result, you’d share in both the profits and losses of the company throughout the years. You’d probably want to pay attention to news that affects both the Fast Food market and the economy in general. One of the potential risks in buying 1,000 shares of the Fast Food Palace is that it will experience some sort of problem, such as people realizing fast food is very unhealthy. If this news was publicized enough, less people might come into the stores.

This could potentially decrease the company’s revenues and, ultimately, the stock price would decline. The opposite would be if my food became so popular that every airport in the United States decided to put a Fast Food Palace inside. This would be incredible news for shareholders because it would generate much more foot traffic, higher revenues, and higher profits.

A bond does not represent ownership in a corporation. Let’s say Russell’s Food Palace wanted to raise money to open 10 more stores, but they didn’t want to divide up the company any further. They might sell bonds instead of issuing stock. Rather than owning a piece of the company, the bondholder becomes a creditor of Russell’s Food Palace who will be paid back over the life of the bond.

The difference is that the return you will earn on your money as a bondholder is generally a fixed percentage such as 5% or 7% annually. If the bond lasts for 10 years, you will get interest each year for the 10 years, and then your principal investment returned to you at expiration date. If you buy a bond from a small, risky company, there is the possibility that the company will go under and you’ll never see some of your interest payments or principal investment ever again. This is rare however, and it’s more likely, in the short term, to lose money in the stock market than the bond market.

Which is better investment? Well, it totally depends on where you are in life and what your tolerance for risk is. I’d rather own something for a period of years in hope for growth, then lend somebody $20 and know I’m getting $25 back in 5 years. Thus, I would probably consider myself more of a stock investor. However, the bondholder may very well feel safer and more secure with his/her investment choice. The ideal long-term portfolio would probably have a little bit of each.

Russell Bailyn

Wealth Management
Premier Financial Advisors
14 E 60th St, Ste 402
New York, NY 10022
(212)752-4343 *231

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

114 thoughts on “The Difference Between Stocks and Bonds”

  1. This article was excellent. In one go, I was fully able to understand the difference between the two.Thanks a lot.

  2. This article was very helpful. I am a finance major and I graduated about 3 years ago and I needed a little brush on this topic.

  3. Concise & Clear.
    Nice article for Newbies.
    Plz add a link with details of different types/Classes of
    Bonds & Shares/Stocks

  4. Well Justin,
    That is the ultimate question! There are many ways people analyze stocks to determine if they are good or bad investments. You can do some research on yahoo finance or to learn more about this research proces. Russ

  5. Finally someone who could clearly explain the difference between stocks and bonds! I am studying Finance and couldn’t seem to get a clear understanding of either. Thanks so much

  6. You have just put an end to my long years of contemplating about the share and bonds. I really want to thank you. I am a bondholder with a the FG in Nigeria and also a shareholder in some companies. Just to know the differences and be better educated and you’ve just done justice to that.
    Will be communication later.
    Nelson, Nigeria

  7. Hi,
    This article helped me a lot. One company propose to open a hostipal here and they ask me if I would like to have some bond. Right now i know this kind of stuff.
    From Philippines. More power to you.

  8. Hi Russ,
    o boy o boy do I just like you or what. Im doing my majors in finance and get embarrassed every time the teacher asks a basic question as that. I really wanna learn finance and I guess I have found the right place.
    Russ, could you direct me to a link where I can strengthen my finance basics?

  9. well, i got yelled at for the last thing that i wrote, so i’m gonna say that this is a pretty good website, and it gave me a lot of information.
    thank you.

  10. Excellent article! Very precise, crisp and informative. It has helped me understand the basic difference between the two.
    Thanks a lot!

  11. This article was great! Really helpful to explain concisely and in a simple manner the differences between shares and bonds, and the simple logic used for deductive reasoning in making a preference between the two.

  12. thanks your way of trasfering knowledge is really help me in understanding difference between bonds and stocks. once again thank u very much.

  13. i have taken up finance in coll i really wanna learn finance an do well in it….. any sites i can visit or anyother way of doin it

  14. Hi, many Thanks for the article that explained me the difference btw. bonds and shares in very simple and easy to understand way.

  15. Thank you! You explained this much more clearly than my professor. Very clear and concise. If you haven’t written a book already, you should. If you have, I want it! :)

  16. So good an article…..very explanatory for even the layman.Keep it up! Ever written a book?…’ld make a very good author.

  17. Outstanding, its so simple and made me understand the concepts. It will really help me understanding the procedure investment companies follow. Also a great use of example by Russell. Thanks

  18. Thank you very much, this article made me understand the difference between the two, other articles only confused me further.

  19. Thank you so much for these valuable information. I was looking for this specific information and thanks to you, I found it. I have a presentation to make tomorrow and this piece of information would sure come in handy.

  20. I’ve gotta say–I’m so glad you all find my article helpful! I had to answer a question in college about this topic so I figured I’d give the clearest answer possible for anybody else researching the same topic. Best wishes to all!

  21. A very big thank you for this explanation. I have been suffering to explain the difference between the two to my 2nd year students. Bearing in mind that i am a teacher of english and not Economics. this really helped me. thanks again.

  22. Russell,
    Being a 2nd year MBA student, you hit the nail on the head. The only thing that I would suggest would be the convertibility to cash. Outside of this, PERFECT! This article will surely assist others that are unfamiliar with these terms and how they may be converted. GREAT JOB!!!

  23. it’s really a good article. Being a 1st year MBA student, it helped me a lot to understand the concept stock and bond.thankes

  24. Thank you for free access to this article, it is very helpful. Now, the difference between bonds and stocks is very clear to me and being a 2nd year MBA student i need to understand the concept.

  25. thks for the information. I am investing in my first 401k and this was much more informative than any of the HR literature I read.

  26. hi,
    Thanks for the simple and precise explanation about the differences between bond and stock. really helps me doing my thesis.

  27. Thank you very much for the information. This explains a lot. Well-written, explanatory and straight to the point. Thank you.

  28. Thank you Russell for performing a huge service to the public specially to little investors like me. Could you write an article in lay terms about the different kinds of bonds and stocks? Thank you again.

  29. Looks like bond investors (fixed income) are getting crushed over the past few years. Stocks seem to be the way to go… but who knows… weird economy.

  30. Thank you for this. I am just now picking my options in my first 401k plan and found this to be quite helpful in determining which investment option I want to go with.

  31. Wow Russ!
    I’m impressed I came along this site by accident and now you’ve given me a better understanding of the difference between the two.

  32. Perfect explanation. Simple and effective and straight to the point…I don’t understand why people over complicate things. Thank you for the explanation!

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