Difference Between Stocks and Bonds

When you buy stocks, you own a portion of that company. When you invest in bonds, you are making a loan to the bond issuer (company or government) who promises to pay you interest as well as the principal by a set date. For example, when you buy a bond with a face value of $1,000, a coupon rate of 5.5%, and a maturity of 20 years, you will receive a total of $55 ($1,000 * 5.5%) of interest per annum for the next 20 years. If you hold the bond to maturity, you will receive the principal ($1,000) back.

Following are the main differences between stocks and bonds:

1) Stocks give you part ownership of a corporation, whereas bonds make you a creditor to corporations or governments.

2) Shareholders will receive higher dividends if the company has good profitability performance, subject to approval by the Board of Directors. Unlike stocks, bondholders will get a fixed rate of return (known as coupon rate) irrespective of how much profit the company make.

3) In case of a bankruptcy, bondholders get paid before common stockholders.

4) Bonds are less volatile than stocks. In other word, bonds are less risky than stocks.

* Next: Why Invest in Bonds?