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What's the Difference Between Stocks & Bonds?

Two happy seniors sitting on bench talking about the difference between stocks and bonds

Before you start your investing journey, you'll likely want to know the difference between stocks and bonds. These are two of the most common types of investment assets, and when planning your investment goals, you'll want to consider which investment could be right for you, or whether a combination of stocks and bonds could be suitable to help reach your goals. Here is some information to consider and keep in mind.

What Are Stocks?

Stocks are investment securities that represent ownership in a corporation. Stocks are issued by corporations to raise capital for the purpose of growing the business. When an investor buys stock, which are also called shares or equity, they share profits and losses as share values rise and fall. Buying and holding stocks may be accessible way to potentially build wealth over time. It's important to note, however, that this investment type cannot guarantee growth, and may instead lose value over time.

How to Buy Stocks

Stocks are most commonly purchased through a licensed financial professional or an online broker. In addition to purchasing the stocks on behalf of the investor, licensed financial professionals can provide investment advice. For do-it-yourself investors, using an online discount broker to buy stocks may be preferable.

Who Could Stocks Be Right For?

Stocks might suit investors who are willing to accept higher relative market risk in exchange for the opportunity to receive higher relative returns. The primary risk for stock investors is market risk, which is the possibility that an investment might decline in value below the initial amount invested. However, successful stocks may help produce higher returns than other types of assets, such as bonds or cash.

What Are Bonds?

Bonds are investment securities that represent a loan from an investor to an issuing entity, such as a corporation or government. The issuing entity promises to pay the investor a specified interest rate, called the coupon rate, for a certain period of time, which is known as the term of the loan. Since the interest payments are fixed, bonds are often referred to as fixed income investments.

How to Buy Bonds

Bonds can be purchased through a licensed financial professional, an online broker or directly from the issuing entity. Investors wanting investment guidance typically buy bonds through a financial professional, whereas do-it-yourself investors may choose to buy bonds online with a broker or directly from the issuing entity.

Who Could Bonds Be Right For?

Bonds might serve the financial plans of investors who want to be paid higher rates of interest than traditional savings accounts, but do not want to accept the greater market risk associated with stocks. Although bonds are typically associated with lower risk, they can also lose value over time.

Similarities Between Stocks & Bonds

Stocks and bonds are both investment assets that could both be ideal for intermediate- to long-term holding periods. This means that if you don't have at least three years to 10 years or more to invest, stocks and bonds may not be the most appropriate options for you.

Difference Between Stocks & Bonds

The most fundamental difference between stocks and bonds is that stocks represent ownership in the issuing entity and bonds represent a loan to the issuing entity. Put simply, when you buy stocks, you're an owner and when you buy bonds, you're a loaner. The other key differences between stocks and bonds lie in their levels of risk and potential return.

Here are the main differences between stocks and bonds:

  • Market Risk: Stocks are typically more risky than bonds, and it may be more likely for the original amount you invest to decrease when you invest in stocks.
  • Price Volatility: Volatility (the swings in price up and down) is often associated with market risk. Stocks tend to be more volatile than bonds.
  • Risk & Return: The risk/return relationship is an important difference between stocks and bonds. If you want the potential for higher returns, and are willing to take more market risk, stocks may be a suitable investment for you. If you are less comfortable with risk, and are willing to accept lower returns, bonds may be your choice.

Although investors might choose either stocks or bonds depending on their risk tolerance and return appetite, there are other approaches available. Many investors choose a combination of investment types. Talking with a registered financial representative may help you determine the best investment strategy for your personal goals.

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