Would you rather own a piece of a company or lend money to it? This choice represents a fundamental decision in investing: stocks versus bonds. Stocks give you ownership in a company, meaning you share in its profits and losses. On the other hand, bonds are like loans you give to a company or government, earning interest over time. Keep reading to learn how they differ plus examples.
What is the difference between stocks and bonds?
| Stocks | Bonds | |
|---|---|---|
| Ownership | When you buy a stock, you’re buying a small part of a company. This makes you a partial owner of the company. | When you buy a bond, you’re essentially lending money to a company or government. In return, they promise to pay you back the amount you invested, plus interest, after a set period. |
| Returns | Potential for high returns if the company does well. | Steady interest payments and return of your money when the bond matures. |
| Risks | Value can go up or down based on company performance. | Generally lower risk compared to stocks; less potential for high returns. |
| Dividends | You might receive payments from the company’s profits. | Regular interest payments as a return on your investment. |
What is an example of a stock and bond?
Example of a Stock: Tesla(TSLA)
- Company : Tesla, Inc (TSLA)
- What it does : Tesla designs and manufactures electric vehicles, solar energy products, and battery storage solutions.
- Owner : When you buy Tesla stock, you own a small part of the company. Tesla's CEO and major shareholder is Elon Musk.
- Stock features : As a shareholder, you might benefit from Tesla's growth and profitability through potential price increases and dividends.
Another example of a stock: Ferrari NV (RACE.US)
- Company : Ferrari N.V. (RACE)
- What it does : Ferrari designs, manufactures, and sells luxury sports cars. The company is renowned for its high-performance vehicles and racing pedigree.
- Owner : When you buy Ferrari stock, you own a small part of the company. Ferrari’s major shareholders include Exor N.V. and Piero Ferrari.
- Stock features : As a shareholder, you might benefit from Ferrari's growth and profitability through potential price increases and dividends.
Example of a Bond: U.S. Treasury Bond
- Issuer : U.S. Government
- What it does : U.S. Treasury bonds are debt securities issued by the federal government to raise funds.
- Owner : When you buy a Treasury bond, you’re lending money to the government.
- Bond features : You receive regular interest payments, known as the bond's coupon, and get your initial investment back when the bond matures.
Another example of a Bond: Italian Government Bond
- Issuer : Italian Government (BTP – Buoni del Tesoro Poliennali)
- What it does : Italian government bonds are debt securities issued by the Italian government to raise funds for public spending and investment.
- Owner : When you buy a BTP, you are lending money to the Italian government.
- Bond features : You receive regular interest payments, known as the bond's coupon, and get your initial investment back when the bond matures. These bonds come in various maturities and can be a stable investment choice for those seeking regular income.
What are the different types of stocks?
| Type of Stock | Description | Features |
|---|---|---|
| Common Stocks | The most typical type of stock. When you own common stock you have a share in the company's ownership. | You can vote on company matters and may receive dividends (a share of the company's profits). The value of common stocks can go up and down based on the company's performance. |
| Preferred Stocks | A type of stock that gives you some advantages over common stockholders. | Preferred shareholders usually get fixed dividends before common shareholders do and have a higher claim on assets if the company goes bankrupt. However, they typically don’t have voting rights. |
| Growth Stocks | Stocks from companies expected to grow at an above-average rate compared to other companies. | These stocks often don’t pay dividends. Instead, investors buy them hoping the company’s value will increase significantly over time. |
| Value Stocks | Stocks from companies that are considered undervalued compared to their true worth. | Investors buy these stocks hoping their value will increase as the market recognizes their true potential. They often pay dividends. |
| Dividend Stocks | Stocks from companies that regularly pay out dividends to shareholders. | These stocks provide income in addition to any potential increases in stock value. They’re often seen as stable investments. |
| Blue-chip Stocks | Stocks from large, well-established companies with a history of reliable performance. | These companies are usually leaders in their industry and are known for stable earnings and dividends. |
| Penny Stocks | Stocks from small, less well-known companies typically priced under $5 per share. | These stocks can be very risky and volatile. They might offer high returns but also come with a high risk of loss. |
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What are the different types of bonds?
| Type of Bond | Description | Features |
|---|---|---|
| Government Bonds | Bonds issued by national governments to raise money. | They are considered very safe because they are backed by the government. Examples include U.S. Treasury bonds and UK Gilts. |
| Municipal Bonds | Bonds issued by states, cities, or other local governments. | They often help fund public projects like schools or roads. Interest earned is usually tax-free, but they carry a bit more risk compared to government bonds. |
| Corporate Bonds | Bonds issued by companies to raise capital for various needs. | These bonds typically offer higher interest rates than government bonds but come with more risk. The risk depends on the financial health of the issuing company. |
| Convertible Bonds | Corporate bonds that can be converted into a certain number of company shares. | They offer the possibility to benefit from a company’s stock price increase. They usually offer lower interest rates compared to regular corporate bonds. |
| Zero-Coupon Bonds | Bonds sold at a discount and do not pay interest regularly. | Instead, they are redeemed at face value upon maturity. The difference between the purchase price and the face value represents the interest earned. |
| High-yield Bonds | Bonds issued by companies with lower credit ratings. | They offer higher interest rates to compensate for higher risk. These are sometimes called "junk bonds." |
| Treasury Inflation-Protected Securities (TIPS) | Government bonds designed to protect against inflation. | The principal value of TIPS increases with inflation and decreases with deflation. Interest payments are based on this adjusted principal. |
| Callable Bonds | Bonds that can be redeemed by the issuer before the maturity date. | They usually offer higher interest rates, but investors might face reinvestment risk if the bond is called early. |
Summary
Now that you've seen the difference between stocks and bonds, which one do you prefer for your investment strategy? Stocks offer ownership and potential growth, while bonds provide stability and regular income. Create a free Skilling CFD trading account today and access popular global stocks such as Tesla, Microsoft, Apple with incredibly low spreads. Source: investopedia.com
