Difference between stocks and bonds

ASPECT

STOCKS

BONDS

Definition

An ownership or equity instrument. Ownership in a firm of which all shareholders are collectively owners of that part of the firm represented by their aggregate equity.

A debt instrument, meaning it is a loan granted by investors to the issuer, for example, a company or government.

Ownership

Stockholders get partial ownership of the company with a claim on the Company’s Assets and Profits.

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Bondholders provide the issuer with a loan of a fixed return in the form of interest.

Returns

Returns come in the form of dividends, when declared, and capital gains-an increase in stock price. There is no guarantee of returns and solely depends on the company’s performance.

Returns are fixed. They come as a series of interest payments made periodically known as coupon payments and the repayment of principal at maturity.

Returns Guarantee

No assurance of returns. Dividends and capital gains are realized based on the company’s performance and market conditions.

These have a guaranteed interest payment under contract, hence providing a regular income stream if the issuer is solvent.

Risk

Risky investment. Stock prices are subject to market conditions. Returns vary with company performance.

Less risky as compared to stock, for the bond owner has a guaranteed amount of interest payout. The risk depends upon how creditworthy the issuer is.

Voting Rights

Stocks (especially common stocks) give shareholders the right to vote on company matters and to elect the firm’s board of directors

Bondholders have no voting rights as they do not acquire any ownership and thus no say in corporate decisions.

Tenure/ Maturity Date

Stocks do not have a maturity date; investors can hold them for an indefinite period or sell them at any time in the stock market.

Bonds have a certain maturity date i.e when the principal amount is repaid to the bondholder, it can take  several years or decades.

Tax Implications

Income received from dividends may be subject to taxation in some jurisdictions. In the United States, for example, a tax called the Dividend Distribution Tax, although indirect, is typically levied. Income realized from the sale of stock is taxed under the capital gains tax.

Interest income from the bonds may be taxable, though there is government and municipal bonds that offer tax-free interest.

Price Volatility

Stocks tend to be very volatile due to change in the economy, fluctuation of the market, and outlook on companies.

Bonds are relatively less volatile by nature but can be affected by changes in interest rates or shifts in credit ratings for the issuer.

Types of Issuers

Issued mainly by corporates that want to raise capital for expansion, projects, or other needs.

Issued by the corporations, governments, and supranational institutions who want to finance various projects and manage their cash flows.

Advantage

May receive higher returns due to price appreciation and dividends. Ownership stake may offer influence over the company through voting rights.

Predictable income through fixed interest payments; less risky than stocks, especially with high-rated issuers. Bondholders are prioritized in bankruptcy.

Disadvantage

More Risk, no assurance for the returns; shareholders are the last in line of pay-outs in case of liquidation.

Lower Potential of Capital Gains compared to equities; Interest payments may be low as compared to the potential returns from equities; No direct influence on the issuer.