What’s the Difference Between Stocks and Bonds?
“Stocks and bonds” is a pairing nearly as familiar as peanut butter and jelly. But just because people often say the words doesn’t mean they're always well understood. Consider this your cheat sheet.
A stock is a share in the ownership of a business. When someone owns a share of stock, they have a claim to a portion of the company's earnings and assets. This means they might be allowed to vote on certain governance issues (such as who belongs on the board) and receive dividends when earnings are high.
A bond, by contrast, is a type of debt investment. (Stick with me, here.) Companies and governments sometimes issue bonds to raise money to pay for things like major projects or activities. They promise to pay back the face value of the bond at a set date—anywhere from days to decades in the future—and to pay interest periodically until the bond is mature. This type of investment is considered a fixed-income security, because both the interest rate and maturity date are defined and explicit.
Not sure which type of investment makes sense for you? This Investopedia video breaks down why stocks can lead to more long-term wealth accrual while bonds typically take the lead for income generation. But investing is rarely about picking one type of investment over the other; rather, it's about finding the right asset mix. As CNN points out, many financial advisors encourage younger investors to tilt their portfolio heavily toward stocks because, although there’s more short-term risk, there's more room for long-term growth in that investment. People closer to retirement, meanwhile, would be wise to favor bonds over stocks for their relative security.