First Bank Explainer: the difference between Bonds and Stocks

Stocks and bonds are often paired together when talking about investments, but both have widely different risks, returns and behaviors.

What’s the difference between stocks and bonds?

Stocks                         

Stocks represent partial ownership, or equity, in a company. When one buy stock, he is actually purchasing a tiny slice of the company — one or more "shares." These shares have a maturity and returns date that is linked to the company achieving profits (variable return), and this return is distributed upon the company decision.

There are two main kinds of stocks, common stock and preferred stock.

The shares or stocks are divided into common stocks, which do not have a maturity date, and preferred stock, which bear a great similarity to bonds have a maturity date, and have a fixed return.

Common stock entitles owners to vote at shareholder meetings and receive dividends.

Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

Companies may issue shares to the public for several reasons, but the most common is to raise cash that can be used to fuel future growth.

Each share of stock represents an ownership stake in a corporation. That means the owner shares in the profits and losses of the company, although they are not responsible for its liabilities.

Bonds

Bonds are a loan from the creditor to a company or government (Debtor). There’s no equity involved, nor any shares to buy. Put simply, a company or government is in debt to the creditor when he buy a bond, and it will pay him interest on the loan for a set period, after which it will pay back the full amount you bought the bond for.

Buying bonds means issuing a debt that must be repaid with interest.

Bonds are distinguished with the existence of a fixed return the cre regardless of the company’s profit or loss.

In short; stocks represent an ownership stake in a company while bonds are debt.

Each bond has a certain par value and pays a coupon to investors over fixed time. After it matures, the investor is returned the full amount of their original principal.