Everyone falls into debt. Whether it's your neighbor, family member or yourself, we all have to recover from our mistakes, learn from it, and start making wise investments. Likewise, the government and large corporations are also susceptible to debts. In this regard, their objective is to secure a loan. Since large corporations need more money than the average person or a group of persons for that matter, they might resort to borrowing from financial organizations. Often times, these corporations need more money than the banks can offer. In this regard, bonds come into play. In simple terms, bonds refer to a loan in which you are the one lending the money. Any company that sells a bond is referred to as an issuer while the lender refers to the investor.
Not only do people invest in bonds but they also invest in stocks. Stocks refer to an assertion of assets and revenue in a company. It involves shares in which you are given part ownership as a result of your investments. Many people have doubts in these tools and may express their concerns in investing in bonds vs. stocks, with relations to their similarities and differences.
Similarities of bonds and stocks
Bonds and stocks are both financial tools that are used by investors to make a profit or capital on what they have invested. Both tools are used by organizations to assist in acquiring funds whether for expansion or operation purposes. Furthermore, the governance of both trades is done by security boards locally. In addition, these too money making tools are known to afford investors security. Even though bonds and stocks are deemed to be secured, they are not risks free.
Differences of bonds and stocks
Stocks are accompanied by greater risks in relation to bonds. Since stocks are ownerships within a company, if that company loses money then the shareholders likewise lose money and vice versa. However, since bonds are loans that are offered at a fixed rate of interest, they are paid back at a fixed price or cost in the form of interest. This means that if the company loses money, you are still entitled to what you formerly invested as a bond. In this respect, bonds are more secured in comparison to stocks. In case a company files for bankruptcy, those that are holding stocks (shareholders) are the last in line to receive anything.
While you are entitled to ownership of a company as a shareholder, whether a small or large part, as an individual holding bonds (lender), you share the debt of the company. While shareholders are part owners and are allowed to make future decisions that impact the company, lenders are not given this privilege. Shareholders share in the profits of the company in the form of dividends while lenders are only entitled to what was stipulated in the terms before they shared the debt of the company. They are given returns on their investments but only a fixed return (interest). A higher return is able to be made, provided that the company profits.
