If you are really interested in investments, or expanding your investment portfolio, you may have heard of stocks and bonds. However, you may not know the exact difference between the two. Stocks and bonds represent different ways in which a person or company can get money to increase its reach and its operations.
What is a Stock?
When a company sells its stock, shares of the company, it is selling a piece of itself in exchange for money. Stocks are sometimes referred to as equity in a company.
There are two different types of stocks: the common stock and the preferred stock.
- The common stock gives its owners the right to have a voice and a vote at shareholder meetings. And shareholders claim a portion of the dividends/profits as a result of their investments. The majority of the stocks of issued are common stocks.
- Preferred stock is similar to common stocks, but they do not offer voting rights to shareholders. However, in response to that, preferred stocks generally come with a guaranteed fixed dividend.
What are the Benefits of Buying Stock?
- Large potential for growth
- Dividend payments
- Shares can give an opinion/influence the company
What is a Bond?
When a company sells a bond, it is an interest growing debt agreement, if the money is used. When you buy a bond from a company or entity, you are technically lending the business the money you bought the bond for. The company/entity promises to pay back the money plus interest after a certain amount of time.
There are several different types of financial bonds that you can choose to purchase. Here are just a few:
- Municipal bonds are bonds that are issued by a city. These bonds are tax-free, which is a good thing. However, these types of bonds typically have low interest rates, and sometimes are defaulted by the city. Cities do not always make good on their loans, usually due to budget issues.
- Corporate bonds are issued by a company. However, corporate bonds are sold by the bank of a company. These are both private and public companies.
U.S. Treasury bonds are issued by the Treasury Department. These bonds are sold on behalf of the federal government. They are one of the most popular and safe bond types, because federal money is basically guaranteed.
What are the Benefits of Buying Bonds?
- You can preserve capital, while investing
- Interest is usually exempt from income taxes
The major difference between stocks and bonds is that stocks are bought and sold in physical places, and bonds are not. Bonds are sold over the counter, and stocks are traded in physical locations dedicated to their exchange. Another difference is that investing in bonds are a little bit less risky than investing in the stock market.
How Can I Avoid Fraud When Investing?
- Publicly offered bonds and stocks must be registered with the SEC
- Do not buy non-registered bonds nor stocks
- Do your research
In short, stocks buy ownership, and bonds buy debt. It is important to know the difference in the two before you start investing. Your money is your power. If you are still unsure on how to get into investing your money, talk to a professional financial advisor. This is someone who is trained and certified to help you make those important decision, they won’t make them for you.
Just remember, when investing, you need to be able to live without the funds you are wanting to invest. Investments are not cut and dry, and you can lose money, so you need to be comfortable with the idea of living without it. You have to study the market’s highs and lows.