Bonds and stocks are two common investment tools, but they have significant differences in nature, risk, and return methods.
Here are their main differences:
1. Definition and basic properties
Bonds: Bonds are debt instruments, meaning investors borrow money from the company or government that issues the bond, and the bondholder becomes the creditor. The bond issuer promises to make periodic interest payments (coupon) and to repay the principal at maturity.
Stocks: Stocks are equity securities issued by a company, which means that after purchasing stocks, investors become part shareholders of the company and have partial ownership of the company. Stock returns typically come from share price appreciation and dividends.
2. Risks and Benefits
Bonds: Risk: Bonds are generally considered to be less risky because those who hold them receive regular interest payments and will be able to get their principal back at maturity (unless the issuer defaults). But if the issuer encounters financial problems or goes bankrupt, bondholders may not receive interest or principal payments on time.
Income: The income of a bond is fixed and mainly comes from the coupon (i.e. the interest rate on the bond). Bond returns are generally more stable, but are usually lower than long-term returns from stocks.
Stocks: Risk: Stocks carry a higher risk because share prices fluctuate and investors' returns are uncertain. When a company performs poorly, its stock price may fall sharply or even incur a loss. Shareholders are not guaranteed dividends, and in the event of bankruptcy, shareholders are repaid after creditors.
Returns: Returns from stocks include share price appreciation and dividends. In the long run, stocks generally offer higher returns than bonds, but they also carry correspondingly greater risk.
3. Priority
Bonds: In the event of company bankruptcy or liquidation, bondholders receive priority over shareholders in receiving compensation. Bonds are liabilities of the company and the debt needs to be repaid first.
Stocks: Stockholders are the last in line when a company goes bankrupt and may only get their investment back after all debts are paid.
4. Investment objectives
Bonds: Suitable for investors seeking stable income and lower risk, especially those who want to obtain a fixed cash flow through regular interest.
Stocks: Suitable for investors with a high risk tolerance, usually used to pursue capital appreciation, especially long-term investors.
5. Term
Bonds: Bonds have a definite maturity date, usually years or decades. Upon maturity, bondholders will receive repayment of their principal.
Stocks: Stocks have no expiry date and the holder can choose to buy or sell them based on market conditions.
6. Profit Distribution
Bonds: Bonds usually pay interest at regular intervals (such as annually or semi-annually). These payments are fixed and are not affected by the company's operating conditions (unless the company defaults).
Stocks: The main sources of income from stocks are dividends and share price appreciation. The payment of dividends depends on the company's profitability, and the company can choose whether to pay dividends.
7. Market price fluctuations
Bonds: Bond prices are relatively stable with small fluctuations, but they will be affected by factors such as interest rate changes and credit risk. For example, when market interest rates rise, the price of existing bonds will fall.
Stocks: Stock prices fluctuate greatly and are affected by many factors, including company performance, market sentiment, and the macroeconomic environment.
Summarize:
Bonds: Fixed income instruments with lower risk, suitable for stable investment, and priority in repayment.
Stocks: Equity investment tools that are relatively risky, suitable for those seeking capital appreciation, with potentially greater long-term returns.
Investors can choose appropriate instruments based on their risk tolerance, investment objectives and time horizon, or achieve a balance between risk and return by diversifying their investments and combining bonds and stocks.
