Question

what is the core difference between stock and bonds

Answer 1

Stocks represent the ownership interest in the company. When the company issues stock, then the buyer of the stocks is actually buying the ownership in that company. It means the buyer of the shares has a share in the profit and loss of the company. When the company performs well, owner of the shares will also make profits and when the company makes losses, the owner of the shares will also lose. A few of the characteristics are:

1. An investor can buy in the primary and secondary market

2. The dividend will be paid to the owner of the stock

3. Common equity shareholders have the last claim at the time of liquidation of the company

4. Gets voting rights

Bonds are the debt obligations issued by the company to raise capital for the company. It is a loan that needs to be paid back with a certain interest rate at a specific time. The company will borrow the money through bonds in the public market and will pay certain coupon rate on specific time period determined at the time of initiation of the agreement till the maturity of the bond and also paybacks the principal amount as well at the end of the maturity period of the agreement. A few of the characteristics are:

1. An investor gets a fixed coupon rate at specific time interval

2. The principal will be paid back at the time of maturity of a bond

3. Has the first claim if the company liquidates.

4. Bonds are less risky than stocks.