What is the difference between a stock and a bond?

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kipling2448 eNotes educator| Certified Educator

While stocks and bonds are conceptually a little similar, they are in definition and practice fundamentally very different.

Stocks are shares of ownership of a company. The more shares one owns, the more of the issuing company one owns. To own more than one-half of the shares in any given company is to, essentially, control that company. When one purchases stocks, one is investing money in the business that is issuing those shares. The word "shares," in fact, denotes the fact of partial ownership in the issuing company. In exchange for purchasing shares in a company--in effect, purchasing stocks--the individual in question receives quarterly dividend payments, which are shares of the company's profits. The more profitable the business, the more the stock-holders receive in dividends. To have purchased stock in a company like Apple at its inception would have, obviously, been a great investment, as the money provided to Apple in exchange for shares of ownership would be dwarfed by the amount of money received in subsequent dividend checks. In other words, a smart investment. The individual investor gambled that an investment in Apple stock would pay out far more over time than was the value of that initial investment.

In contrast to stocks, bonds are loans given by the issuing company, or government (i.e., U.S. Government Treasury bonds) in exchange for repayment with interest at some predetermined date in the future. Many government-issued bonds "mature" after ten years, meaning that they can be redeemed at that period of time for the cash equivalent, plus interest. When companies issue bonds, they are asking investors to loan them money in exchange for repayment some time down the road with interest. Bonds, unlike stocks, do not represent ownership shares in the issuing company or government. When you purchase a bond, you are simply lending money; you are not receiving shares in the company's ownership.

A key distinction between stocks and bonds is the level of risk. Purchasing stocks can carry a high level of risk, although that is not always the case. Had one invested in Apple, to continue the above scenario, and the company failed, the money the investor used to purchase stocks would have been lost. There is no guarantee that stocks will pay off; that is entirely dependent upon the profitability of the business. Bonds, on the other hand, are low-risk investments that will almost always pay off, especially if issued by a legitimate government. Many parents purchase bonds for their children as a way of saving for those children's future. Stocks may similarly be purchased as a means of long-term savings, but they carry far more risk.