What's the difference between a stock and a bond?

Introduction
Stocks and bonds vary greatly so it is important to understand these differences as you begin to invest. Stocks are generally characterized as a higher risk but higher return option and bonds are typically classified as the lower risk but lower return option. However, even this statement is not always true. Consider the following points made that differentiate a stock from a bond:

Stocks

• Higher Equity - Stocks have higher equity because they represent ownership of a company. A stock entitles the stockholder to the rights of partial ownership in a company.


• Higher Risk - When you invest your money in purchasing a stock there is no guarantee that you are ever going to see that money again. No one is obligated to return your money to you. You accept all risks associated with making a purchase and no one will refund your money in full if the investment turns out to be a bad one.


• Higher Return - As a stockholder, and therefore partial owner of a company, you are entitled to a proportionate amount of that company's success. There is no set interest rate to tie you down. When your stock does well, you get a piece of that accomplishment.


• Longer Term - Most stock investments yield the largest returns when they are left in the stock market for a long period of time. The market is more volatile short term, but overall prices have been increasing. You may not see a return on your investments for many years. But when you do see that return it is typically higher than it would have been had you put that money in a more accessible account.


• Variable Rates and No Guarantees - There are no interest rates and no re-payment agreements. You accept all risks associated with the stock when you buy it. There is no one to blame if your investment does not turn out the way that you wanted.


• Some Stock is Safer than Other Stock - Not all stock is dangerous. There are some companies whose stock has been around for years and it is expected that returns will continue to be steady. However, the laws of supply and demand will still apply. The demand for highly safe, high return stock will always be met with a short supply.

• Debts, not Equity - Bonds are classified as debt because they represent an obligation to pay. With a bond you do not have any ownership rights. You own no assets.


• Lower Risk - Bonds are required to be repaid. However keep in mind that low risk does not necessarily mean no risk and defaults are still possible.


• Lower Return - The returns of a bond are in the form of interest payments. Interest payments are typically paid semi-annually.


• Shorter Term - Bonds have a maturity date. You know the time period that your money is going to be tied up. There is a definite beginning and an end to the investment.


• Fixed Interest Rate - You know what returns to expect up-front and should be able to plan in making a set amount from interest rate payments.


• Company bond vs. Government bond - Company bonds have higher interest rates because the risk of them not being able to pay back the bond is higher. Government bonds, on the other hand almost guarantee timely repayment and therefore offer lower interest rates.

Conclusion
After listing all the differences between stocks and bonds, it is hard not to notice that there are similarities as well. Both bonds and stocks carry risks with them. No investment is a guarantee, at least not always in the exact amount expected. Regardless of whether you choose to invest in a stock or a bond it is wise to do your research. Bonds vary in reliability just as stocks do. You would not want to enter into a bond with a company on the brink of dissolving. Likewise, you would not want to buy stock from a failing company. Despite, and maybe even more accurately because of, the differences between stocks and bonds it is a good idea to have a combination of them both.