Quezi

Market board at the Philippine Stock Exchange Plaza in Manila. Photo by Katrinakatrina. CC=BY.

Although stocks and bonds are very popular types of investments, they are far from the same thing.

Stock refers to ownership in a corporation. If you buy stock, you are buying a share in the company (in fact, the basic unit of stock is called a share, and they typically range in price from a few cents to a few hundred dollars).

Although there are different types of stock, it is common for stock to give you the privileges of ownership. You may be entitled to attend stockholder meetings and even vote for the company’s board of directors and on other company matters. And if the company makes a profit, you may get your share if it in the form of a dividend, a payment given to people who own shares.

Many people own shares indirectly, such as through a retirement account, although it is possible to buy shares directly. Stock shares typically don’t have a fixed price — they are sold on an open market (such as through a stock exchange), and the price will go up if investors think the company will do well and go down if investors fear otherwise. You can earn money if the price goes up while you own the stock and you sell it, and even if the price goes down you might earn money through dividends. Although as a stockholder you are a part owner, the worst that would happen if the company goes bankrupt is that your stock would become worthless; you don’t have to worry about having to pay any of the company’s bills.

Bonds don’t involve company ownership. A bond is nothing more than a way for companies to borrow money. Suppose a company needs $1 million. It sells bonds to get that $1 million and promises that after, say, three years it will buy back those bonds for $1.2 million.

Like stock, bonds are often sold on the open market. If you own bonds and think the company won’t be able to buy them back (“redeem” them), for example, you might sell them at a discount. Governments can also sell bonds to raise money. Because governments very seldom default on bonds, and because earnings from government bonds may be exempt from taxes, government bonds often pay a lower interest rate than private bonds.

Stock and bond markets can have an influence on each other. When stocks are doing poorly, bonds may become more attractive to investors and their prices may rise. And when the stock market is going up, bonds may become less attractive to investors and thus go down in price.