Comparison: Stocks vs Bonds

 

What is the difference between a stock and a bond?

Well, if you own the stock, then you own part of the company. But if you own a bond, you make a loan.

But how do I make money from stocks and bonds?

With stocks, you get a share in the profit of the company through dividends. And you also get a share in the growth of the company through an increase in the price of the stock.

And with bonds, you get interest on the money that you lend, and you get the principal amount back at the end of the term.

But how is stock investing different from bond Investing?

Well, with a stock you own part of the company. So get a say in some of the things that the company does through voting. You also take up risk – if the company does well, you can earn from the increase in the stock price and dividends. But if the company does not do that well, then you do not make any money.

But with a bond, you make a loan to the company, so you have very little risk. That way, you earn irrespective of whether the company does well or not.

But what happens if a company does really, really, really badly? Like if it goes bankrupt?

Well, if a company were to go bankrupt, than the stockholders or people who own the stocks, would lose all of the money that they invested because stock price would crash. But bondholders would be paid using the money that was obtained from the sale of the assets, like land and factories.

Thank you very much for telling me what the difference between a stock and a bond is, Wall Street Willy.

You’re welcome, Sooper Cooper. Remember, finance is your friend!

Podcast: Stocks vs Bonds

11 Key Personal Finance Concepts You Must Know for Financial Success

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