I’m sure everyone has heard about “stocks” and “bonds” before, but if you’re brand new to investing you might not know exactly what they are – and what makes them different.
This quick overview from TD Ameritrade gives a nice overview:
What is a stock?
A stock represents partial ownership (or equity) of a company. This gives you voting rights but the company has no obligation to pay you a dividend. Your total return is the combination of the increase in the price of the stock and any dividends the company might pay you while you own the stock.
When an investor buys stock, they are buying equity.
What is a bond?
A bond a loan (or debt) that a company, municipality, or government is selling to you. The company/government has a contractual and legal obligation to pay you interest (usually quarterly) as well as your principal back when the bond matures. The price of a bond can fluctuate just like a stock’s price, and you can sell the bond before it matures if you want. Bonds are viewed as safer investments than stocks because bondholders must be paid before stockholders, but returns on bonds are usually lower than on stocks.
When an investor buys bonds, they are buying debt.