You often hear the words stocks and bonds used in the same phrase. But did you know that while “stocks and bonds” often come in the same breath, the terms are not interchangeable? Don’t worry, you’re not alone! And while you may think your consumer debt makes the investment a closed door, that doesn’t have to be the case. There are some key differences between stocks vs bonds, and we’re going to help make it more clear so that when you’re ready to invest, you know exactly what’s what.
Stocks vs Bonds
Let’s get right down to it and learn the difference between stocks vs bonds.
What are Stocks?
Stocks are a popular form of investment. When you purchase a stock, you are buying a share in a specific company. In other words, you now own equity or partial ownership in that company. And the success of your stakes or share (your invested funds) depends on the success of the company. That’s why the stock market is known for being unpredictable with many ups and downs. Depending on your investment personality and risk tolerance, keep in mind that what you decide to invest in will impact your returns.
Higher risk stocks can (and likely, will) fluctuate in value over time. If you have time to let your money grow, consider a higher risk – higher reward option. If you don’t want to take too much of a risk, consider buying stock in a well-established, stable company. Your returns will likely be of lesser value but maintain stability. Even the most experienced of investors can run into trouble by putting all of their eggs in one basket, so we recommend diversifying your investment portfolio.
Bonds, on the other hand, are more of an “IOU”. A bond is essentially a debt that makes you, the bondholder, a type of lender. When a company, organization, the government (remember War bonds?), or another entity needs money, they try to get money from you, the investor. The bond is debt security that yes, you lent this money, but the organization will repay you, with interest, over X amount of years. And thus, that is where consumers can make a profit for the future. Generally, you will be paid small sums until the bond matures, at which point you get are repaid the full amount.
Takeaway: Stocks vs Bonds
Bonds are generally less risky than stocks. The return on investment is more secure, unless the bond defaults, meaning that the company can’t pay you. While you can sell your bond before it reaches maturity, you should take the current interest rate into account to ensure you don’t lose money.
Stocks are riskier but have a higher payoff value over time. And, you can easily re-evaluate your stock options at any time.