Let’s get back to the basics. Stocks and bonds are both instruments used by companies to raise capital. But what exactly does that mean and how are stocks and bonds different? Nathan Ritchison, CFP® walks you through the differences between stocks and bonds and the risk factors of both.
“Sometimes in my client meetings I get questions about or looks at least, that indicate that maybe people don’t understand what a stock and a bond are.
So I thought today what we do is go over what a stock and a bond are just from a very basic perspective.
Both instruments are used by companies to raise capital.
So a stock is usually issued to transfer ownership over from a company into an individual’s name.
A bond, on the other hand, is like an IOU.
A debt instrument of a company.
So these two instruments are really used by companies to raise capital.
So a stock is really a share of a company, or an ownership of a company, that then gets traded on an exchange.
So depending on what the value is of a particular company and if the value increases, which we all hope it does, then the stock will become more valuable.
Stocks also carry with them dividends, which are excess earnings paid out to individuals who own the shares – shareholders – in the form of excess earnings and income.
Bonds, on the other hand, are IOU’s. Like I said, they’re debt instruments.
So these are issued, usually with a principal value, and then interest along the way.
But at the end of the term of a bond, you’re going to get your principal back.
So typically, bonds have less risks than stocks because you get this guaranteed principal repayment at the end of the bond.
Now if you have more questions about this please log on to purefinancial.com
We have great resources there that can point you in the right direction.”