• Shahn Khan

How Stocks are different from Bonds?

In the stock market, stocks and bonds are two of the most important building blocks for any investor.

Stocks and bonds represent two different ways for an entity to raise money to fund or expand its operations.

When a person buys a stock is buying an actual share of the company, so essentially the owner of the stock has a share in the profits and losses of the company.

Whereas Bond is, when a government, corporation, or other entity that needs to raise cash will borrow money in the public market and subsequently pay interest on that loan to investors.

A bond is a certificate of debt. Essentially, you are lending money to whatever entity is issuing the bond. When you buy a bond, you’ll be able to see the price, the time to maturity, and the coupon rate. The coupon rate is the money you’ll eventually get. It is generally shown as a percentage of the principal you spent on the bond.

Bonds have smaller return potential than stocks, but they are preferred by investors for whom less risk and stability is a priority. Also, bonds are stable than stocks. While their prices fluctuate in the market—sometimes quite substantially in the case of higher-risk market segments—the vast majority of bonds tend to pay back the full amount of principal at maturity, and there is much less risk of loss.

Investing in a bond also renders your money illiquid, meaning it’s locked away and inaccessible for a period of time unless you’re willing to incur a big penalty to take it out prematurely.

Note, Unlike stocks, bonds are hard to buy and sell as an individual.

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