What is the Difference between Bonds and Stocks?

Stocks offer you a partial ownership right in one or more organisations, whereas bonds are a fixed liability issued by an organisation or government to investors. Generally, it includes a particular interest payment and maturity date.

There may be confusion between bonds and stocks as both of them are investment options; however, they have several differences. Stocks provide an opportunity for better long-term returns than bonds. Conversely, investing in bonds is more stable than stocks. To know about bonds vs stocks in further detail, keep reading.

Bonds are basically high-security debt instruments, which helps an organisation to raise funds and meet its capital needs. It is categorised under the debts availed by borrowers from prospective investors for a particular tenure. Small and large-scale companies, including municipalities, governments, and other organisations, issue bonds to attract investors to pool the funds they require. The issuer of the bond utilises the fund generated to implement various measures like undertaking welfare activities, refinancing existing debt, funding expansion, etc.

Stocks refer to financial securities, which exemplify part-ownership in one or more organisations. You can become a shareholder of an organisation when purchasing its stock. Generally, investors intend to purchase stocks of organisations with the belief that their prices may increase in the future. Thus, as soon as there is a boom in the price of the stock, the stockholder sells those stocks and gains a substantial amount of profit. In addition, it helps in lessening the effect of market inflation for an extended period.

Bonds are ordered into various types depending on their returns and legal obligations. Mentioned below are the types of bonds available in the public debt market:

1. Fixed-Interest Bonds

The fixed-interest bonds are debt instruments that increase coupon rates consistently during the tenure. These pre-set interest rates help potential investors to get the expected returns on investment (ROI), regardless of the prevailing market conditions. Furthermore, in this bond, creditors get to know the receivable interest rates from time to time during a long-term investment.

2. Floating-Interest Bonds

The floating-interest rate bonds perform with a fluctuating interest rate according to the prevailing market conditions. Thus, the return on investment through interest income remains inconsistent and is influenced by the condition of the economy, inflation, etc. 

3. Inflation-Linked Bonds

Inflation-linked bonds are some specialised bond instruments that help in diminishing the rate of economic inflation on return on investment and face value. In comparison with fixed-interest bonds, inflation-linked bonds offer lower rates of interest.

4. Perpetual Bonds

Perpetual bonds are rare kinds of bonds which do not possess any date of maturity. While investors would not receive their principal back, they continue to get interest payments forever. Typically, these bonds show a date of maturity when the principal amount will be repaid and the payment of interest cycle will come to an end.

Stocks are categorised into two main types as stated below:

1. Common Stock

Common stock is the most favoured type of stock in which people make their investments in bulk. This stock signifies partial ownership in an organisation, wherein shareholders have the right to get a share of the value of any left-over asset if the organisation gets dissolved. 

In the long run, the common stock usually generates better returns than other types of investment through capital growth. The higher returns are generated at a fixed cost as common stock is associated with high risks. If an organisation liquidates and become insolvent, the common stock shareholders will not get any fund till the preferred shareholders, bondholders, and creditors get paid.

2. Preferred Stock

In comparison with common stock, preferred stock works differently. It signifies the degrees of ownership in an organisation. However, it does not offer similar voting rights. Another notable benefit of this stock is that such shareholders get paid off much before the common shareholder during liquidation of the company. 

Preferred stock gives the right to an organisation to buy shares from shareholders whenever they need. The net outcome of preferred stock is that it matches more closely with fixed-income bond investments than normal common stock.

In case of a bond, they perform much better in short-term, whereas in case of a stock they turn volatile during the short-term. Regarding long-term returns, investing in stock seems more effective than bonds due to the latter's underperformance in that span. While speaking of earnings, a bond enables an individual to generate funds via interest. On the other hand, a stock generates income through a dividend.

However, it is entirely dependent on your risk appetite and investment objective, alongside your preference for where you will put your funds. Additionally, keep in mind that whatever investment option you are choosing is prone to risks. Hence be cautious about your financial status while making your decisions.