The difference between a bond and a share lies in the risk, profitability, maturity, and rights that are acquired.
The profitability, risk, and rights that are acquired are lower in a bond than in a share.
It is very important to know the differences between bonds and stocks because they really are two totally different assets.
In finance, both the bond and the stock are considered financial assets.
We will explain what each of them consists of and then we will look for similarities and differences between the two.
When we buy a bond, we deliver an amount of money (the capital of the operation) to the bond issuing entity.
That promises to return it to us at the end of the established term together with a percentage of interest.
The company issues this debt through bonds so that the general public can buy it.
A feature that makes bond issuance almost exclusive for large companies.
On the other hand, a share represents an aliquot part of the capital stock of a Public Limited Company.
By acquiring shares or stocks, we are obtaining the category of a partner, contracting certain rights and obligations.
Our decision-making capacity will depend on the percentage of the capital stock represented by our shares.
If the company obtains benefits, we can participate in them through the dividends received.
Joint analysis of the bond and the stock:
Buying a bond is offering a loan to the company that issues it. From the point of view of the issuer of the bond, the amount loaned is placed in liabilities, because it is debt.
Whereas with the shares, we are acquiring part of the company and we become partners.
For this reason, for the company, the capital invested in shares is located in its social capital, within the net worth.
As the capital paid up by the owners of the company: the partners.
Fixed income versus variable income:
The yield on the bond is independent of how things have gone for the company.
It is a fixed income instrument because we know in advance that we are going to receive interest.
That can be fixed (agreed upon when contracting the bond) or variable (based on a reference index).
The bond does not give us voting rights, the holders of the bonds are merely creditors of the company.
Stocks, unlike bonds, are a variable income instrument. That means that there is no economic remuneration established by contract for the shareholder.
But it will depend on how the company is going through.
If the company deems it convenient, it will distribute dividends (performance of the operation).
Otherwise, we will not receive any remuneration but we will continue to be partners as long as we hold the shares.
One of the non-economic characteristics of bonds is not having decision-making power.
Another important characteristic of the bonds is in the term of the operation. In these, a period is agreed upon during which the contract is in force.
The shares are perpetual, you are the owner of the shares as long as you do not sell them.
Both bonds and stocks are instruments that exist within the capital market.
For the investor, they are a way of making use of their money, and for the issuer a way of obtaining liquidity.
In both cases, and before carrying out the operation, the person must ask himself: how much money does he have and of that amount, how much would he be willing to lose?
What is the risk that he wants to take? What is the time he can wait? and how much does he want to earn?
The shares have a perpetual character. He will be the owner of them as long as he does not sell them.
Instead, the bonds have a term of operation that is agreed in the contract.
Bonds return the total amount of invested capital. The risk is much lower than that of stocks, where their price varies.
That is depending on the market value. It can exceed any profitability limit or leave none. Since profitability is not assured.
Are bonds doing better than stocks?
The answer is simple, it depends on you and your investor profile. Bonds fit a conservative profile while stocks are aimed at riskier people.
If you are not in a hurry to obtain profitability, you could become a shareholder.
But if you do not want to wait so long and want, at least, to have a certain date, the recommendation is to acquire bonds.
It does not matter if your final decision is bonds, stocks or you are advising yourself to build a portfolio that mixes both.
Always, before investing, it is key to know how the financial assets work as a whole, the company or entity.
What is the definition of stocks and bonds?
When you invest your money in the shares of a company, you immediately become a partner of it.
And obtain rights and obligations, no matter the number of shares. Also, it does not matter how small this number is, you will still be a partner and a piece of the company is yours.
Of course, the power of decision does influence how much these shares represent within the percentage of share capital.
When you acquire a bond, you deliver your money to the entity that issued it. And the latter agrees to return it to you in an agreed time, by both parties.
And will additionally give you an extra percentage, which is the interests and is the real profit for doing the operation.
From the point of view of the entity, the bond is a debt. For the investor, it is a fixed income instrument because he knows from the beginning that he will receive interest.
Are bonds a good investment if the market crashes?
At large, diversifying in the bonds can offer a cushion that helps to protect investors from the stock market downturn full impact.
Although, it is necessary to be alert to the market fact which certain bonds including funds are likely to suffer several losses when the market crashes.
Do bonds lose money in a recession?
The interest rates risk depends on how sensitive the price of the bond rates changes.
According to the expert Scott Braddock who is the CEO of Scott Braddock Financial in Raleigh, North Carolina – “When interest rates are cut in a recession, the value of bonds can deteriorate”.