- Stocks are considered ownership. That is, if you own a share of stock in a company, you also own a share of ownership in the company, which entitles you to a share of company earnings as well. Additionally, as the market value of the company grows, so does the stock price. As a result, stockholders, as owners of the company, have the opportunity to receive income in the form of dividends as well as share price appreciation on stock owned.
- Bonds are not considered ownership. That is, bondholders are more akin to creditors. In exchange for the use of funds, bondholders are promised a certain rate of interest. For instance, in exchange for $1,000, the bondholder may be paid 10 percent interest, which equates to $100. Usually bondholders are paid on a semi-annual basis. At the end of the bond's duration, the bondholder is paid back the full amount of the loan in addition to interest.
- As owners, stockholders are entitled to vote on certain corporate actions. Bondholders are not considered owners and therefore are not involved in company decisions. Bondholders rely primarily on the annual report and legal financial disclosure documents to inform them of company operations. It is because of this relationship that bondholders are given priority over stockholders in the event of a bankruptcy or liquidation of assets.
- Perhaps the largest difference between bonds and stocks from an investor perspective is that bonds are considered lower risk than stocks. While bondholders may only lose a percentage of their total investment in the event of a bankruptcy, stockholders can lose their entire investment. Likewise, stockholders have the potential to receive unlimited returns. So in exchange for additional risk, the stockholder requires additional return. The bondholder is content with regular interest payments. This is one reason stocks and bonds are great for portfolio diversification, as they have such different payment characteristics.
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