What's the Difference Between a Stock and a Bond?

Written by Greg, founder of FTMarketWatch — a former licensed commodities trader, self-directed investor since. Not a licensed financial advisor.

Short answer: A stock represents partial ownership in a company, with returns that can be higher but less predictable. A bond represents a loan you make to a company or government, which generally pays a fixed rate of interest and is typically less volatile than stocks, though it isn't risk-free.

Detailed Explanation

When you buy a stock, you become a part-owner of that company. Your return comes from the stock price rising (or falling) and, sometimes, dividend payments. There's no cap on how high a stock can rise, but there's also no guarantee it won't fall sharply or become worthless.

When you buy a bond, you're lending money to the issuer (a government or a company) in exchange for regular interest payments and the return of your principal at maturity. Bond returns are generally more predictable than stock returns, but bonds can still lose value, particularly when interest rates rise or if the issuer's credit quality deteriorates.

In a bankruptcy, bondholders are generally paid before stockholders, which is one reason bonds are usually considered lower-risk than stocks from the same issuer. Because of this different risk profile, many portfolios hold a mix of both — stocks for long-term growth, bonds to reduce overall volatility.

What's the Difference Between a Stock and a Bond?

Detailed Explanation

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