Question

Discuss three commonalities between stocks and bonds. Discuss three differences. If you were a business owner, would you prefer to issue stocks or bonds to raise money? Why? If you were an investor, would you prefer to own stocks or bonds? Why?

Answer 1

Similarities between stocks and bonds :

Stocks and bonds are both securities. Corporations make new stocks issue and bond issue for the same purpose of raising money. Both stocks and bonds are traded on the Securities and Exchange Commission. The stocks and bonds are sold on the secondary market.

Differences are:

Stocks holding make the owner of stocks a part of the company whose stocks they are holding and they receive returns when the company is making profits. A bond holder is a lender to the company or the government. Stocks are indefinite and bonds are for a fixed maturity period.

Company may prefer bonds instead of shares because bonds offer tax advantage. When companies pay interest to their lenders , this offers them tax advantages.

Investors also prefer bonds because , they receive a steady income when they invest in bonds. The rate of interest paid by bonds is fixed and that cannot be changed. Stocks provide higher returns but bond are more stable, although the returns on the long run is low. The company, whose bonds we have invested in, promises to pay us interest on the principal amount invested and also promises to pay back the amount, when the bond matures.