What's the Difference Between Stocks and Bonds?

Most people understand the merits of investing. By tucking money away into an investment opportunity, you can increase your capital and enjoy large returns. But everyone also understands that investment often comes with risk, and it’s hard to know which investments might be safe enough for your hard-earned dollars. Investing is difficult because there are so many similar options. When it comes to investing, what’s the difference between stocks and bonds, anyway?

They’re often mentioned in the same breath, and held up by many as examples of good investments. “Put your money into stocks and bonds,” you may hear, or “buy some stocks and bonds, to increase that cash.” The two are brought together in sentences so often, it would almost be possible to believe they’re two peas in a pod.

How different are stocks and bonds, from each other? When you invest in stock, you buy shares of a company – any company that offers publicly-traded stock, anyway. Investors put their money into these shares, and sit back and watch them (hopefully) rise on the open market. At some point, this stock is traded or sold for profit. And that, in a nutshell, is how the game is played. It’s a large, open market of trading, yet all that passes around is money. Investors who know how to play the stock market game can gain big, but they can also lose big. Many investors like the excitement and intensity of trading stock, and it’s a great investment for those that can keep up with a changing market. In many cases, investing in stocks is a good way to get ahead with a short-term investment.

Bonds, by comparison, are very different. When buying bonds, investors “loan” money to companies and get an agreed-upon interest rate on their money in return. Selling bonds is a good way for a company to improve and add more to their business. Bondholders, the investors, receive checks from the company they invest in at set intervals. Many different companies, even governments, can issue bonds to investors. Usually, the biggest returns from bonds are enjoyed on a long-term investment basis. For those wanting to invest their money somewhat safely for, say, twenty years, bonds are a good place to start looking.

What’s the difference between stocks and bonds? There are plenty of similarities – stock certificates and bond certificates even look alike. Bonds often mature at a much slower rate than stock, which is always subject to public market and demand. Both can be risky, but both can bring big returns. It all boils down to how active you want to be with your investment. Can you watch the market and make quick decisions on your stocks, or would you rather wait and watch bonds grow over time? They are two sides of the same investment coin – yours.