What is the difference between stocks and bonds?

Answer

Stocks (aka Equities): Stocks represent partial ownership of a corporation. If the corporation does well, its value increases, and you share in the appreciation. However, if the corporation goes bankrupt, you can lose your entire initial investment.

Bonds (aka Notes): Bonds represent a loan you make to a corporation or government. For example, you can buy a US Treasury bond for $100, and get a guaranteed 4.75% interest rate for 5-years, and can expect to get your $100 back at the end of that 5-years. Your risk is repayment of the principal (amount invested). Because loaning $100 to the U.S. government is much less risky than loaning $100 to the Brazilian government, U.S. government bonds pay a much lower rate of interest ("coupon") for borrowing your money.

Stocks and Bonds .... How do they differ

Stocks are EQUITY. They represent shares of ownership in a Corporation. A Stockholder is actually one of many owners of a Publicly Owned Corporation. If a Corporation dissolves for any reason owners of Common Stock (the main type of stock issued) receive the value of the sold assets of the Corporation AFTER everyone else is paid, including the IRS, Employees, Bonds, Accounts Payable, etc.

Bonds are DEBT. They are sold by the Corporation in order to raise money for various purposes for use by the company. Bonds offer an interest rate to the Bondholder for the period of time that the Bondholder owns the bonds.

Since bonds do not represent ownership, the bondholder could lose their investment if the Corporation dissolves, but are paid BEFORE owners of stock.

First answer by Fledermaus. Last edit by Stox723. Contributor trust: 72 [recommend contributor]. Question popularity: 5 [recommend question]