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Question:


What’s the difference between a stock and a bond?
-Investing101


Answer:


A stock represents a fractional ownership in a business and its assets and is the vehicle through which shareholders accumulate the profits of the business in proportion to the number of shares they own. They receive the earnings either directly as a cash dividend or else – if all goes right and they didn’t pay too much for their stake in the company to begin with – through the appreciation of the price of the stock. A bond is a debt instrument. If you own a bond issued by a company or by a government entity such as the U.S. Treasury or a county water district, then the face value of the bond is the amount that the issuer owes you. Bondholders receive regular interest payments, which are compensation for entrusting their money to the borrower.
 
The main concerns of a bondholder are that the borrower will do well enough to cover present and future interest payments and that inflation will remain low so that the value of the interest payments does not erode. That’s why bonds often perform better when the economy is doing only so-so, as has been the case recently. Amid such a backdrop, defaults and inflation tend to be low, an ideal combination for bondholders. Stockholders accrue all benefits to a company after interest payments are made, so they generally need a stronger economy to perform at their best. The reward for the extra risk that holding a stock often entails is that the sky’s the limit. The best that bondholders can do is get all of the interest they’re owed, plus their money back when the bond comes due, but there’s no ceiling on the amount that stockholders can receive.
-Conrad de Aenlle



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