Stocks and Bonds are Inherently Different
Bonds trade on the bond market (different than the stock market), for one. But the real difference lies in how they’re created and sold. You may think that bonds are boring, but please bear with me.
Stocks are initially released by companies as partial ownership in the company. Look at it this way: you pay the company to own part of it.
Have you heard the phrase “Freeing up capital“? Issuing stock is a way companies can do that. By selling stock shares they are getting money, which is capital, they didn’t have before. It’s a way of getting cash without selling equipment, buildings, etc… And they aren’t taking a loan to get money either. You’re giving the company money to expand and grow, instead of just paying the bills.
A bond is a loan you’re giving to a corporation or government entity. You’re actually loaning them money for a specific project, with the anticipation you’ll be paid back in full. Plus interest, of course. A company takes on debt when they issue bonds. Do you see how this is different than stock?
The federal government, your state, or your city can issue bonds. This is what I meant in the above paragraph – a government entity. They have highways and schools to build, after all. They need money to complete those projects. Getting small loans from lots of people helps finance those projects. Your city can’t issue stock the way Apple or IBM could. Only corporations can issue both stock and bonds.
Stocks: You own the company.
Bonds: You are owed by the company.
Interesting, you say. But how do I make money on bonds?
Usually bonds pay you the interest once or twice a year. Sometimes it’s with a return of your initial investment. The length of a bond loan varies, but can last a long time… 30 years or more, even.
In most cases, the interest rate paid to bond owners is determined when the bond is created. You know exactly what it will pay you each year. This is why bonds are a/k/a Fixed Income [Fixed Income Securities, Fixed Income Funds, and a bunch of bonds is referred to as a Fixed Income Portfolio]. You can anticipate what it will pay you for owning it.
(If you would like to learn about floating interest rate bonds, check out this page.)
Related to that time I said income paying stocks were desired by retired folks: so are bonds.
A young professional probably doesn’t need a lot of fixed income investments, and she would be better off investing where there’s a chance of making a higher return on her investment. That’s general sentiment among financial professionals. If you’re 30, and you have bond funds instead of stocks… you’re probably leaving opportunity for growth on the table.