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 .01% 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
Premier Financial Advisors
(212)752-4343 *31
rbailyn@gmail.com
Comments
Thank you for the article it helped me with my homework.
Posted by: mike yoo | February 2, 2006 08:30 AM
A very concise and informative article.
Posted by: Purabi | March 29, 2006 02:13 PM
Good article, thanks!
Posted by: Anonymous | April 21, 2006 02:40 PM
This article was excellent. In one go, I was fully able to understand the difference between the two.Thanks a lot.
Posted by: Niraj | June 5, 2006 05:42 AM
Great article! Thank you!
Posted by: Alex | June 14, 2006 12:22 PM
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.
Posted by: T Miller | June 14, 2006 05:44 PM
Great Article! Thanks
Posted by: Rao Bollepalli | July 26, 2006 04:27 PM
Concise & Clear.
Nice article for Newbies.
Plz add a link with details of different types/Classes of
Bonds & Shares/Stocks
Posted by: hasan | December 1, 2006 08:48 AM
Thanks IT Helped me much more as I hoped.
Thanks a lot.
Posted by: Manoj | December 5, 2006 03:38 AM
Excellent article for beginners.
Posted by: Debt Consolidation | December 22, 2006 08:33 AM
Thanks for the explanation, however I have a question. How do you know that this is a good or bad investment?
Posted by: justin larbi | January 9, 2007 11:23 AM
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 about.com to learn more about this research proces. Russ
Posted by: Russell Bailyn | January 9, 2007 05:07 PM
easy way to understand diffrence between stocks and bonds
thanks
avani
Posted by: avani biyani | February 13, 2007 01:52 AM
thanks excellent I did not know the difference. it is simple and understandable
Posted by: Enkhbat | March 26, 2007 04:54 AM
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
Posted by: Jolene | April 12, 2007 08:54 PM
thanks good information
Posted by: henry tumanyane | May 7, 2007 11:00 AM
Thanks ıt help me to do my homework:).Perfect article.
Posted by: ÇİĞDEM | June 3, 2007 11:09 AM
thanks for the information, it helps a lot.
Posted by: cybelle | June 19, 2007 05:11 AM
it's a very understandable artcle even for a person who has no knowledge of this topic. Thank you!
Posted by: Sergey | July 4, 2007 11:59 AM
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
Posted by: Nelson Akinwande | July 25, 2007 12:56 PM
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.
Posted by: Province of Antique | August 16, 2007 03:35 AM
This was a very good article to read.....
great job!
Posted by: aanchal gupta | September 15, 2007 06:06 AM
Clear and Useful Information!
Posted by: Rushang Kansara | October 17, 2007 03:53 AM
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?
Posted by: Nazish A.K | October 21, 2007 02:20 AM
This article is excellent. I am very happy.
You can continue in future also please.
Posted by: pradeep reddy | November 6, 2007 06:22 AM
It is one of the best article which gives easy understanding
Posted by: archana | November 28, 2007 12:54 AM
Really useful and helpful for me studying for exams coming soon!
Thanks! =)
Posted by: Duri! | December 1, 2007 01:01 PM
thanks for your explaination.
Posted by: tranquan | December 21, 2007 01:32 AM
good article
Posted by: geetu | December 29, 2007 01:05 PM
Hi I have a senior project and I realy need a mentor can you help me
Send email if you can
Posted by: Jay | January 2, 2008 12:44 PM
that was really a lucid explanation. Thank you for helping me to clear my doubt.
Posted by: Ranu | January 7, 2008 05:54 AM
very well-written and easy to understand
Posted by: marlin | January 10, 2008 02:16 PM
Thanks a lot. It is simple and understandable way of explaining it.
Tekle
Posted by: Tekle | January 15, 2008 11:10 PM
good info for newbies.
looking forward for more info regarding stocks/bonds
Posted by: ram | January 22, 2008 04:37 PM
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.
Posted by: amanda mckrell | March 7, 2008 11:51 AM
Great way to explain this type of things. I used this for class.
Posted by: Lojimaster | March 7, 2008 11:57 AM
Excellent article! Very precise, crisp and informative. It has helped me understand the basic difference between the two.
Thanks a lot!
Posted by: Parankush | April 1, 2008 12:18 PM
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.
Posted by: Dhaval Patel | April 7, 2008 01:47 AM
Exactly what I was looking for. Thanks!
Posted by: Valerye Roberts | April 8, 2008 03:44 PM
thanks your way of trasfering knowledge is tremendous.it really help me in understanding difference between bonds and stocks. once again thank u very much.
Posted by: M Faheem ul haq | April 13, 2008 11:02 AM
Hi,
Thnks for your info. I was really confused on what is different btw bonds and shares.
Posted by: Vaibhav | April 30, 2008 10:37 PM
The article is great, very straight to the point. thank you
Posted by: Caitlin | May 9, 2008 12:06 PM
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
Posted by: harsh chhabra | May 15, 2008 11:37 PM
Hi, many Thanks for the article that explained me the difference btw. bonds and shares in very simple and easy to understand way.
Posted by: Peter | June 1, 2008 11:02 AM