Both stocks and bonds represent types of investments. They are equally popular among active investors. In fact, it is considered a practical necessity for an investor to diversify their activities and focus on both types in order to develop a stronger portfolio. Being types of investments, stocks and bonds exist for the purpose of raising money and generating profit that is further going to be used in order to fund the expansion of an investor’s opportunities and investment capacity.
In order to explain the differences between stocks and bonds, it is important to explore each of these concepts separately and provide a definition. In that way, stocks represent shares of companies which they are ready to sell in exchange for money offered by the investors who purchase the stocks (Morah, 2017). A decision to issue stocks is usually made in a company when the volume of profit that it generates on a regular basis is insufficient in regard to funding this company’s desired activities and expansion.
Funds raised by means of issuing stocks present the required addition to assets. At the same time, bonds stand for debt in the form of money borrowed in the public market by an entity that intends to raise funds (Kenny, 2017).
Purchasing stocks in companies, investors become able to create more profit and generate a better interest. However, this type of investment also exposes them to risks. Specifically, profit from stocks is directly connected to the success of the company to which it belongs. If the company enjoys high revenues and shows excellent results during a particular period, its investors benefit from it. Also, if a company faces losses, its stock owners do as well. In case of the bankruptcy of a company, all of the investment in its stock may be lost. In contrast, bonds are much more secure and provide a guaranteed return on investment.
The difference is in the volume of profit bonds are able to generate, which is significantly lower than that of stocks. To sum up, the level of risk and interest rate represents the main differences between stocks and bonds.
In the books of the buyer, stocks are carried as certificates of ownership, while bonds do not involve ownership and are presented as certificates that oblige the buyers to pay back the agreed-upon rate of interest to the issuer at the end of the established period of time (Goodman, 2018). Stocks that can be owned by buyers are distinguished by two types – common and preferred. The owners of the former have more rights in a company than the investors in the latter. The issuers of stocks and bonds both enjoy funds that they raise after issuing. Aside from these pros, the major cons for issuers are the pressure for generating the required profit.
Issuing bonds, companies are bound to pay back the interest regardless of their financial security and status. This is a significant con for bond issuers. Also, with stock, a company is not obliged to pay mandatory interest rates as does the issuer of debt; instead, it can generate dividends to its stock buyers. At the same time, issuing stock, a company offers ownership certificates to additional shareholders, thus diminishing the power of the current ones and inviting more decision-makers to the picture (Terzo, 2017). This is a common outcome when a company takes a more inexpensive path and decides to share its common stock.
References
Goodman, J. (2018). Stocks and bonds. Web.
Kenny, T. (2017). Differences between stocks and bonds. Web.
Morah, C. (2017). What is the difference between the bond market and the stock market? Web.
Terzo, G. (2017). Pros & cons of issuing common stock. Web.