Stocks are securities that represent owning a part of a company while Bonds are debt securities that represent loans borrowed by the government or a company.
This article further discusses the key differences between stocks vs bonds.
Jump to a section:
- What are stocks?
- What are bonds?
- Differences between stocks and bonds
- Comparing stocks and bonds
- Similarities between stocks and bonds
- Stocks vs bonds FAQs
What are Stocks?
Stocks are asset classes that represent owning a part or fraction of a company. They are also referred to as equities.
Whenever you buy a stock in a company, you own a piece/fraction of the company. Units of the stock you own are known as shares, making you what is called a shareholder.
What are Bonds?
Bonds are debt securities where an investor lends money to the government or a corporate body in exchange for an agreed interest.
In simpler terms, bonds are loans issued by investors to corporations or the government to fund projects with an agreement to pay within a period with regular interest payments.
Difference between Stocks and Bonds
| S/N | STOCKS | BONDS |
| 1 | Stocks are equity instruments | Bonds are debt instruments |
| 2 | The return on investment for stocks is not guaranteed | The return on investment for bonds is guaranteed |
| 3 | Stocks are high-risk investments | Bonds are low-risk investments |
| 4 | Stock owners of a company are regarded as shareholders and they have voting rights during the decision-making process | Bond owners are regarded as creditors and they do not have voting right during the decision-making process |
| 5 | Stock investment does not have a fixed time of maturity. | Bonds have a fixed time of maturity. |
Comparing stocks and bonds
Below are some factors to further make comparisons between stocks and bonds:
1. Equity vs Debt
Stocks represent equity. They let you own a slice of a business or company through purchases of shares. Bonds represent debt. They involve lending money to a business or government—but do not give you any form of equity. Bonds only make you a creditor.
2. Duration
Bonds usually have a preset duration which the investment runs through, while stocks do not have any preset period. You can become a shareholder for as long as you want, except in the event of liquidation.
3. Voting rights
Stocks give you a right to vote when certain decisions are being made in an organization, while bonds do not allow their holders to have any voting right in the said organization.
4. Inverse performance
Historically, it has always been noted that bonds can be inversely proportional to the performance of stocks such that if the price of bonds increases, the price of stocks decreases and vice versa.
Stocks are also very volatile, compared to the performance of bonds.
5. Fixed income vs Capital gain
Unlike stocks, bonds have guaranteed and fixed returns on investment at the end of the agreed duration. Stocks, on the other hand, do not have guaranteed returns.
See it this way:
Bond: Say you buy a bond, with an agreed interest rate of 15% per annum for a duration of 5 years. This means that every year (for 5 years), you will get a 15% return on investment of whatever amount you have initially invested. At the end of the fifth year, you will get your initial capital/principal investment.
Stocks: Say you invest a particular amount of money by buying shares of a company in the stock market. There are no guaranteed returns as the return on investment on your principal is tied to the value of the performance of the said company. If the company is performing well, the value of your principal investment increases but if otherwise, the value of your investment decreases.
Similarities between Stocks and Bonds
- Stocks and bonds are both popular types of investments that allow you to build your investment portfolio and grow wealth. Depending on your risk appetite, you can choose to invest in either or even both of them.
- They are both classified as investment securities or asset classes.
- They are both traded on capital markets.
- They are also regulated by the Securities and Exchange Commission.
Are bonds safer than stocks?
Bonds are generally more stable and safer investment options. They could however have lower returns compared to the possibilities in stock options.
Are bonds better than stocks?
It depends on your risk appetite. If you are looking for a low-risk investment, you might want to consider bonds over stocks. If you are more risk-loving, you can consider stocks.
Difference between stocks and shares
A stock is the fractional ownership of one or more companies, while shares refer to the unit of ownership in a company.
Difference between bonds and shares
Bonds are loan investments to a corporation or government while shares refer to the unit of stocks in a company.
Difference between stocks, bonds, and mutual funds
A mutual fund is a system of investment whereby funds are collected from a large pool of investors to purchase a variety of securities. These securities may include a selection of stocks, bonds and other securities.
Stocks, bonds, and mutual funds are a great way for investors to build diversified portfolios.
Bottom Line
Bonds and stocks are good investment options. Venturing into either of them is dependent on your risk appetite. You can take our risk assessment test to help you identify your level of risk tolerance. We will also advise that you seek the help of a trusted financial advisor to guide you through. Remember, at Cowrywise, we are committed to helping you build wealth.
