Stocks and bonds are financial instruments for investors to obtain a return and for companies to raise capital. Put very simply, stocks offer an ownership stake in the company and bonds are akin to loans made to the company.
Stocks of a company are offered at the time of an IPO (Initial Public Offering) or later equity sales. The company offers investors an ownership stake by selling stocks. Stocks can be either common stock or preferred stock. Preferred stock is further divided into participating and non-participating preferred stock.
With the equity that stocks offer comes greater risk. The value of stocks corresponds to the value of the company and therefore, stock price fluctuates depending upon how the market values the company.
In contrast, bonds are loans offered at a fixed interest rate. When a company believes that it can raise capital cheaper by borrowing money from banks, institutional investors or individuals, they may choose to offer interest-paying corporate bonds. With bonds, an investor is promised a fixed return. While bonds are "safer" than stocks because of lower volatility, it should be noted that there is always a chance that company will be unable to repay bond-holders. In that sense, bonds are not "risk-free".
However, when a company declares bankruptcy, stockholders are the first to bear losses. Creditors (including bond-holders) are next.
|Kind of Instrument||Debt||Equity|
|Meaning||In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest||In financial markets, stock capital raised by a corporation or joint-stock company through the issuance and distribution of shares|
|Holders||Bond holders are in essence lenders to the issuer||The stock holders own a part of the issuing company (have an equity stake)|
|Centralization||Bonds markets, unlike stock or share markets, often do not have a centralized exchange or trading system||Stock or share markets, have a centralized exchange or trading system|
|Yield Analysis||Nominal yield, Current yield, Yield to maturity, Yield curve, Bond duration, Bond convexity||Gordon model, Dividend yield, Income per share, Book value, Earnings yield, Beta coefficient|
|Participants||Investors, Speculators, Institutional Investors||Market maker, Floor trader, Floor broker|
|Issued By||Bonds are issued by public sectorauthorities, credit institutions, companies and supranational institutions||Stock are issued by corporation or joint-stock companies|
|Derivatives||Bond option, Credit derivative, Credit default swap, Collateralized debt obligation, Collateralized mortgage obligation||Credit derivative, Hybrid security, Options, Futures, Forwards, Swaps|
|No. of Types||12 Types||4 Types|