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Stocks vs. Bonds: What's the Difference?

Brief Rundown:


To stock or to bond? A question that has been debated for many, many decades without a clear, correct answer. If you’ve ever considered investing, then you’ve probably heard people talk about putting your money into stocks or bonds to make your money grow. But, the question that naturally follows is: How do these investment vehicles generate a return on your hard-earned money and why choose one over the other?


A stock is a unit that represents actual ownership in a company. Take Apple for example. They are a public company that issues stock in the form of shares to investors. These investors buy shares of Apple on an exchange and, in return, are entitled to a portion of the company’s profits in the form of dividends and share appreciation. Using numbers, we can more easily understand this ⇒

  • Let Apple be a public company valued at $1,000 with a current share price of $100

  • This means that if you buy 2 shares of Apple ($200) then you would “own” 20% of the company

  • Thus, if the company earns $100 in profit for the year, then you’d have a claim to 20% of company’s earnings and assets

    • However, owning shares is NOT the same as actually owning the company because of the legal structure

  • Therefore, you gain the ability to vote in company board meetings, receive dividend distributions, and sell your shares on an exchange

Why are stocks a thing?

  1. They enable companies to raise money by selling shares (a portion of their company) to outside investors

    1. This helps them pay down debt and expand their business

  2. Investors can put money into brands that they like (think Apple, Nike, Amazon, etc.) and earn return through appreciation and dividends

    1. Additional benefits include pride in ownership, passive income, diversification, and liquidity

A bond is a fixed income product that you mainly buy from companies and the government. You pay them an upfront principal amount and they give you regular, recurring interest payments until the bond matures (i.e., the expiration date). Again, let’s look at an example to make this more clear ⇒

  • Say the government issues a $1,000 bond expiring in 5 years to fund the federal budget

    • This means you give them $1,000 upfront (similar to a loan) and they agree to pay you interest @ 5% each year for 5 years

    • Thus, you get $50 in income over the 5 year period, totaling $250

  • You also get the entire principal amount of $1,000 at the expiration date

    • So, you put in $1,000 to get $1,250 over time

Bonds also trade on an exchange, but are much less liquid (i.e., it is harder to sell them in a quick manner and the price is not as defined).


Why are bonds a thing?

  1. They provide much-needed funding to the government and companies to further government projects like infrastructure, medicare, defense and social security and allow companies a way to pay down debt and expand without giving up ownership rights of the firm

  2. For investors, they provide a less volatile and rather stable return when held to maturity

    1. You lock in a fixed interest rate whenever purchasing the bond and get that rate for the life of the bond


So, now we’re back to question of which is better for investing, stocks or bonds?


Well – you’re not going to like this answer because it is one that is so common in life – the truth is that it depends.


In reality, a combination of the 2 is what is best for most people because having a diversified portfolio is the best way to generate a good return while minimizing risk.


The 60/40 portfolio has been the golden balance that investment professionals have followed for decades because it provides the upside of stocks with the stability that bonds offer – that is investing 60% of your money in stocks and 40% in bonds.


I hope the concepts described above were clear and if you’re curious to learn more, check out the links below!


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