20+ Differences between Bonds And Stocks (Explained)

People coming from a financial background are highly aware of what Bonds and Stocks are. But those coming from non-financial backgrounds may have difficulty understanding the differences between Bonds and Stocks.

The major difference between Bonds and Stocks is what they represent when a person buys them. The former is concerned with representing the owners as the lenders of an organization, while the latter is concerned with representing one’s ownership in an organization.

Comparison Between Bonds And Stocks

Parameter	Bonds	Stocks
Meaning and purpose	It refers to a financial instrument that depicts an organization’s debt or borrowings. The main purpose of these instruments is to generate funds by issuing Bonds to people in exchange for money and making their company’s lenders.	It refers to a financial instrument that depicts an organization’s equity. The main purpose of these instruments is to generate funds by issuing Stocks to people in exchange for money and making their company owners.
Types	It can broadly be classified into three main types: Corporate, Treasury, and Municipal Bonds.	It can broadly be categorized into two main types: Common and Preferred. However, there are other categories of Stocks as well, such as Class A Stock, Class B Stock, Growth Stock, Value Stock, International Stock, IPO Stock, Large Cap Stock, Middle Cap Stock, Small Cap Stock, Blue Chip Stock, Penny Stock, ESG Stock, Cyclical Stocks, and Defensive Stocks.
Represent	The only thing these instruments represent is an organization’s debts or borrowings.	The main thing that these things represent is an organization’s equity or ownership.
Owners	The people who own these instruments are referred to as Bondholders. Since these instruments represent debt or borrowings, the owners of these instruments are also known as the lenders of the respective organization.	The people who own these instruments can be referred to as Stockholders. Since these instruments represent equity or ownership, the owners of these instruments can also be known as the owners of the concerned organization.
Return	Since Bondholders lend money to an organization, it makes the concerned organization liable to pay the desired interest to all the respective Bondholders.	Since Stockholders are the owners of an organization, thus it is the respective organization’s duty to pay a dividend to all the Stockholders.
Time of Payment	Bondholders, being the lenders of an organization, are paid before Stockholders.	Stockholders, being the owners of an organization, are paid after the payment of debt and Bondholders.
Guarantee of Return	If we compare Bonds with Stocks, there is more guarantee of receiving the return because the returns of Bonds are associated with the promise given to Bondholders by the issuers regarding the interest. Along with that, the Bondholders are paid first than other forms of debt.	There is less guarantee of receiving the dividend on the Stocks. This is largely due to the fact that the performance of Stocks depends on lots of factors, and at times, a Stock might not perform well. And, it is almost impossible to predict the performance of any Stock.
Amount of return	The owners of these financial instruments are entitled to a fixed sum of return.	The owners of these financial instruments can be paid fixed or variable sums of money depending on the nature and type of the Stock.
Issued by	There is a wide variety of organizations that issue Bonds. These are largely issued by government organizations, non-profit organizations, financial institutions, etc.	In comparison with Bonds, Stocks are issued by only a few types of organizations. These are largely issued by corporate companies.
Market and Trading	The Bond market is the concerned place where the purchase and sale of various Bonds take place.	The Stock market is the concerned place where the purchase and sale of various Stocks take place.
Instrument	Since they represent an organization’s debt, they are also referred to as debt instruments.	Since they represent an organization’s equity, they are also referred to as equity instruments.
Risk	These instruments are considered less risky than Stocks, and thus is because the return in the form of interest is guaranteed when it comes to Bonds.	These instruments are considered riskier than Bonds, and this is largely because the return on these instruments largely depends on their performance, and there is no guarantee on it.
Benefits	The major benefit of investing in Bonds is the return received in the form of interest.	The benefits of Stocks are not limited only to the return in the form of a dividend, but along with that, a Stockholder also gets to vote on the major decisions of the concerned organization.

Major Differences Between Bonds And Stocks

What exactly are Bonds?

Bonds can be best described as financial instruments that are put for sale to collect funds that act as borrowings. When an organization needs funds, they let people buy their bonds in return for the money.

This money then acts as borrowed funds, and Bonds serve as debt instruments of an organization. People who buy these Bonds and pay the desired money are referred to as lenders of the concerned organization. Since the organization borrowed money from Bondsholder, they must pay them the desired interest regularly.

Features of Bonds

Financial instruments depicting an organization’s borrowed funds are known as Bonds.

It largely represents an organization’s debt.

People owning Bonds can be best described as the lenders of the concerned organization.

For the organization, it must pay Bondholders some form of interest regularly.

Various organizations offer such instruments, such as government companies, non-profit organizations, financial institutions, etc.

It can broadly be categorized into three types: Corporate, Municipal, and Treasury.

The sale and purchase of these instruments take place in Bonds markets.

Key Differences: Bonds

It is a financial instrument that denotes a company’s borrowed funds. These instruments are offered to the public, and the money collected from purchases serves as the capital.

These instruments depict nothing but an organization’s debt. Due to this reason, they are also known as debt instruments.

The owners of such instruments are referred to as lenders or bondholders of a company.

In turn, the organizations offering Bonds must pay some form of interest to the company’s lenders.

What exactly are Stocks?

Stocks can be best described as financial instruments representing an organization’s equity or ownership. When a company needs funds, it can gain and increase capital by issuing Stocks to people. People buy these instruments and gain a percentage share of ownership in the concerned organization.

Thus, stockholders are also known as owners of an organization. Since people have invested their money in the organization, it becomes the concerned organization’s duty to regularly pay the stockholders some sort of dividend.

Features of Stocks

Financial instruments depicting the equity or ownership of an organization are known as Stocks.

People owning Stocks can be best described as the owners of an organization.

The concerned organization has to pay dividends regularly to the respected stockholders.

Corporate companies largely offer such instruments.

These instruments can be broadly categorized into two categories: Common and Preferred. Other categories include Class A Stock, Class B Stock, Growth Stock, Value Stock, International Stock, IPO Stock, Large Cap Stock, Middle Cap Stock, Small Cap Stock, Blue Chip Stock, Penny Stock, ESG Stock, Cyclical Stocks, and Defensive Stocks.

The sale and purchase of these instruments take place in Stock markets.

Key Differences: Stocks

It is a type of financial instrument that denotes a company’s equity. These instruments work by selling an organization’s ownership in return for money/funds collected by the public.

These instruments depict an organization’s ownership. Due to this reason, they are also known as equity instruments.

The owners of such instruments are referred to as owners or stockholders of a company.

In turn, organizations offering Stocks have to pay some form of a dividend to the company’s owners.

The Contrast Between Bonds And Stocks

Meaning and Purpose

Bonds – A type of financial instrument that depicts an organization’s debt is referred to as Bonds. Its sole purpose is to generate funds or capital by means of borrowing from people. It works by offering Bonds to the public in exchange for money and making the concerned individuals the lenders of the concerned organization.

Stocks – A type of financial instrument that depicts the equity of an organization is referred to as Stocks. Its sole purpose is to generate funds by offering people a part of an organization’s ownership. It works by offering Stocks to the public in exchange for money and making the concerned individuals the owners of the concerned organization.

Types

Bonds – They can broadly be categorized into three types: Corporate, Municipal, and Treasury.

Types of Bonds and Stocks

Bonds

Treasury Bonds: These types of Bonds are issued to the general public directly by the government of the United States of America (USA). Since they are offered directly by the government, they are considered the least risky. However, these Bonds are not subjected to high-interest rates and involve the payment of federal tax.

Municipal Bonds: as the name suggests, city or state authorities issue these types of Bonds to the general public. The significant advantage of such Bonds is that these do not involve any kind of tax payment.

Corporate Bonds: These types of Bonds are largely issued by various corporate companies and have a very high rate of return. The only drawback of such Bonds is that they involve paying all types of tax.

Stocks

Common Stock: These types of Stocks are the most common and widely used Stocks. These types of Stocks are concerned with a fixed rate of dividend. They reflect an individual’s ownership and voting rights in the concerned organization. However, the dividend payment happens after the debt payment and Preferred Stockholders.

Preferred Stock: These types of Stocks are concerned with a fixed rate of dividend that is paid before the payment of Common Stockholders. However, a Preferred Stockholder can not be considered the owner of an organization and thus receive no voting rights.

Represent

Bonds – It is concerned with representing borrowings or debts of an organization. The whole point of Bonds is to generate borrowings from people in exchange for Bonds. Thus, they represent nothing but the debt or borrowings of an organization. Each Bondholder represents the money the concerned organization has borrowed from him.

Stocks – It is concerned with representing equity or ownership of an organization. When people buy Stocks, they pay money and, in return, get a part of the organization’s ownership. Each Stockholder represents his share of ownership in the concerned organization.

Owners

Bonds – People who own these financial instruments are known as Bondholders. When people buy Bonds and lend money to the concerned organization, they become the Bondholders of the respective organization. Since these instruments depict their borrowings, they are also known as the lenders of the concerned organization.

Stocks – People who own these financial instruments are known as Stockholders. When people buy Stocks in an organization, they acquire a part of their ownership by paying for those respective Stocks and become Stockholders of the concerned organization. Since these instruments depict their ownership, they are also known as the owners of the concerned organization.

Return

Bonds – Normally, when people lend money from someone, they pay interest as a charge on the lent money. When people are lending money to an organization, it becomes their right to have interest in return from the concerned organization. An organization must pay interest to all of its Bondholders at regular intervals.

Stocks – Stockholders are considered no less than the real owners of an organization. When any corporation earns profit, it is divided among all the owners of the concerned organization. Thus, it remains the same even in the case of Stockholders. An organization must pay dividends to all of its Stockholders.

Interest and Dividend: A comparison

Interest

It is a type of return received when someone lends money to someone else. In the context of this article, it can be best described as the return received on Bonds.

This type of return is considered mandatory to pay.

The amount of this type of return is always fixed.

When a company has people who have invested in their Bonds and Stocks, then the payment of interest is done first and considered a priority.

It is considered a charge against the profits.

Dividend

It is a type of return received by people who have invested their money in an organization by buying their Stocks.

This type of return is not considered mandatory to pay. This is so because the payment of this return largely depends upon the performance of the concerned Stocks.

The amount or rate of return depends on the types of Stocks. In some cases, it is fixed, while in others, it is not.

The payment of this return is made after the payment of interest.

It is referred to as an appropriation of profit.

Time of Payment

Bonds – When it comes to who is paid first, Bonds have the edge over Stocks. Since Bondholders are considered the lenders of an organization, thus it becomes their duty to make sure the Bondholders are paid first.

Stocks – Since Stockholders are considered the owners of an organization, they are paid after the Bondholders are paid.

Guarantee of Return

Bonds – If we compare Bonds with Stocks, there is more guarantee of receiving the return. This is because the returns of Bonds are associated with the promise given to Bondholders by the issuers regarding the interest. Also, the Bondholders are paid before the Stockholders are paid.

Stocks – There is less guarantee of receiving the dividend on the Stocks; this is largely because Stocks’ performance depends on many factors, and at times, a Stock might not perform well. And it is almost impossible to predict the performance of any Stock.

Amount of Return

Bonds – The rate of return is fixed in these instruments since both the parties (lender and borrower) must have settled onto a certain interest rate. Hence, the Bondholders receive a fixed sum of money as return or interest.

Stocks – The rate of return is both fixed and variable because the payment depends on the performance and type of the concerned Stock. For example, people owning Common Stock are not entitled to a fixed dividend, but people owning Preferred Stock are.

Issued by

Bonds – Unlike Stocks, Bonds are issued by various types of organizations. A wide variety of organizations, such as government organizations, non-profit organizations, financial institutions, etc. In comparison with Stocks, Bonds are issued by more numbers and types of organizations.

Stocks – Stocks are issued by a limited number and types of organizations in comparison with Bonds. Most of the companies that offer Stocks are corporate companies.

Market and trading

Bonds – The purchase and sale of different Bonds take place in Bond Markets. In these markets, the respective instruments are traded over the counter.

Unlike Stock Markets, this market does not have any centralized system of trading. To earn money through these markets, then one can do so by receiving interest from the respective Bonds.

Stocks – The purchase and sale of different Stocks take place in Stock Markets. These markets have a centralized and secured system of trading. These markets operate during only fixed timings of the day. To earn money through these markets, one has to try to sell their current Stocks for a higher price than when they first bought them.

Type of instrument

Bonds – Since they represent an organization’s debt, they are considered debt instruments.

Stocks – Since they represent an organization’s equity or ownership, they are considered equity instruments.

Benefits

Bonds – There are not many benefits of Bonds. The main benefit of purchasing Bonds is the interest that is received in return from the concerned organization.

Stocks – The main benefit of Stocks is that, along with dividends, an individual also gets voting rights in the major decisions of the concerned organization. This is because Stockholders are considered owners of an organization. As owners, they have every right to have their say in the major decision-making process.

Risk

Bonds – Since there is a more guarantee of receiving a return than Stocks, thus, these are considered less risky than Stocks.

Stocks – Since the major part of return largely depends on the performance of the respective Stocks, these are considered riskier than Bonds.

Conclusion

When a company is in need of some funds, it can generate funds in two ways, i.e., through Bonds and Stocks. Both terms are often confused with one another, possibly due to various similarities.

Bonds are concerned with depicting debt, and their respective owners are considered lenders of an organization. Stocks are concerned with depicting equity, and their respective owners are considered owners of an organization.

Frequently Asked Questions (FAQs)

Q1. What are the people who own Bonds and Stocks called?

People who own Bonds and Stocks are known as Bondholders and Stockholders, respectively. Bondholders can also be described as lenders of an organization since they lend money to the concerned organization. On the other hand, Stockholders can also be called the owners of an organization since they have acquired a part of an organization’s equity.

Q2. What are the benefits of being a Stockholder?

The benefits of being a Stockholder are not limited to only receiving dividends. Along with that, the Stockholders also get to vote in the major decision-making processes of the concerned organization.

Q3. What are the different types of Bonds and Stocks?

The former can be broadly categorized into three main types: Treasury, Corporate, and Municipal Bonds. And the latter can be broadly categorized into fifteen types: Common Stock, Preferred Stock, Class A Stock, Class B Stock, Growth Stock, Value Stock, International Stock, IPO Stock, Large Cap Stock, Middle Cap Stock, Small Cap Stock, Blue Chip Stock, Penny Stock, ESG Stock, Cyclical Stocks, and Defensive Stocks.

Q4. What do Bonds and Stocks represent?

Bonds are concerned with the representation of an organization’s debt or borrowings. At the same time, Stocks are concerned with the representation of an organization’s equity or ownership.

Q5. Where are Bonds and Stocks traded?

Stock markets are concerned with the purchase and sale of Stocks. These markets are very secure and have a centralized system of trading. On the other hand, Bond markets are concerned with the purchase and sale of Bonds.