Bonds vs. Stocks: Key Differences You Should Know

The investment world offers a plethora of opportunities and assets to trade. Despite the growing popularity of cryptocurrency and forex investments, diversification opportunities offered by mutual funds and ETFs, stocks and bonds have never lost their ground.

However, before deciding where to put your money in, you should clearly understand the major differences between stocks and bonds. Both offer unique opportunities for investors.

Let’s delve into the fundamental capabilities of these two investment vehicles and explore their distinct characteristics.

Table of Contents Table of Contents

1. Key Takeaways
2. What Are Stocks & Bonds, and How Do They Work?
3. Stocks vs. Bonds: Key Differences
4. Shareholder Rights vs. Bondholder Rights
5. Should You Buy Stocks or Bonds?
6. Where to Buy Stocks and Bonds
7. Stock Taxes vs. Bond Taxes
8. Bonds vs. Stocks: Key Advantages and Disadvantages
9. Bonds Pros and Cons
10. The Bottom Line
11. FAQs
12. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. What Are Stocks & Bonds, and How Do They Work?
3. Stocks vs. Bonds: Key Differences
Show Full Guide
4. Shareholder Rights vs. Bondholder Rights
5. Should You Buy Stocks or Bonds?
6. Where to Buy Stocks and Bonds
7. Stock Taxes vs. Bond Taxes
8. Bonds vs. Stocks: Key Advantages and Disadvantages
9. Bonds Pros and Cons
10. The Bottom Line
11. FAQs
12. References

What Are Stocks & Bonds, and How Do They Work?

What Are Stocks?

A stock represents part ownership in a company. The value of this holding will depend on the price at which its shares are trading on the stock market.

Being a shareholder gives a person the right to share in a company’s profits and have a say in the overall direction of the business.

What Are Bonds?

A bond represents a loan that you’ve made to a government or company. It doesn’t give you an ownership stake in the business.

A bondholder will ‘lend’ money in exchange for an agreed rate of interest and their original investment returned on a future date.

Stocks vs. Bonds: Key Differences

How is a bond different from a stock exactly? While both of them enable individuals to invest in companies, there are a number of differences.

Shareholder Rights vs. Bondholder Rights

Bonds vs. stocks trading gives investors different rights. For example, shareholders become part owners of the business.

Depending on the value of their stake, these investors can potentially wield a lot of power in the boardroom and affect how the company works.

They can also benefit from sharing the profits made via dividend payments. However, there are no guarantees that any will be issued.

Unfortunately, should the company go into liquidation, shareholders will be the last people to see any money, if any at all.

This is where bondholders have an advantage, according to Fidelity.

“That is because they fall under the category of creditors and so are repaid before shareholders,” it explained.

Even if the issuer defaults on its debts, there is often a chance of recovery, it pointed out, citing the example of Argentina, which defaulted on its government bonds in 2001.

Fidelity added:

“Despite dealing with a severe economic crisis and despite what turned out to be a complicated legal issue, the country restructured its debts and, over several agreements, arranged to pay back its investors some portion of their principal amount.”

Should You Buy Stocks or Bonds?

So, the big question is: stocks vs. bonds — which is better? Unfortunately, there isn’t a straightforward answer to this question.

Let’s take a look at how you make money from each of them.

Buying Stocks

The idea of stocks (shares) investing is you buy them in the hope that their value will rise over time.

There is also the possibility that the company will pay you a dividend out of any profit that it makes. However, this isn’t guaranteed.

Buying Bonds

The way you make money from bonds is different. You buy a bond in exchange for receiving a set amount of interest over a certain number of years.

You can also make money if you buy bonds at a discount to their face value.

Where to Buy Stocks and Bonds

Stocks are traded on various financial exchanges across the world.

The demand for individual shares will influence the price at which they’re sold.

These days, it’s very easy to start trading and investing. You can set up an account with an online broker and begin your investing journey almost immediately.

Unlike stocks, bonds aren’t publicly traded on an exchange. As they are traded over the counter, you must buy them from brokers.

According to BlackRock:

“Because bonds are not traded on a centralized market, it can be difficult for investors to know whether they’re paying a fair price.”

Stock Taxes vs. Bond Taxes

The taxes that apply to stock and bond investors will largely depend on where they live, so it’s important to understand the regulations in your jurisdiction.

For example, the taxation of stocks in the US is primarily subject to capital gains tax and will be determined by factors such as the length of time it’s been owned, according to Experian.

Meanwhile, bonds issued by federal governments may be exempt from state and local taxes, according to Vanguard.

“Depending on the laws where you live, income from municipal bonds may also be exempt from local taxes,” it explained. Talk to a tax advisor for more information about the rules in your state.”

In the UK, meanwhile, investors can hold assets such as bonds and stocks within Individual Savings Accounts (ISAs).

Holding such assets in these tax-efficient vehicles means investors don’t have to pay UK income or capital gains tax on money they make.

Bonds vs. Stocks: Key Advantages and Disadvantages

Stocks Pros and Cons

Anyone interested in stocks and bonds will want to know the various positives and negatives of each approach.

Bonds Pros and Cons

The next stage of our stocks vs. bonds focus looks at the positives and negatives when it comes to buying bonds.

The Bottom Line

So, when to buy bonds vs. stocks? Well, both asset classes have clear pros and cons. The decision, therefore, will depend on what you’re trying to achieve.

For example, bonds are generally classed as being safer, although there’s always the chance of losing all (or some) of your money with investing.

FAQs