Stocks vs. Bonds: What Are the Differences?

How much do you know about the differences between stocks vs. bonds? Read on to get a clear understanding of the differences between them.

Did you know that over half of all Americans own stock? However, very few investors own bonds these days despite their predictable income stream. 

Do you know the difference between stocks vs. bonds? Both investment methods have their advantages if you understand how they work.

The following guide will explore what stocks and bonds are and how to buy them both. Read on to learn if either is a good investment option for you.

What Are Stocks?

Stocks represent owning shares of different corporations. Companies that issue stocks sell a portion of themselves for investors’ cash.

They help expansion after a corporation survives the startup phase and becomes successful. Capital markets help these corporations gain additional money to further grow.

One way to gain money is to split the company into shares. Then, the company can sell some of these shares as an initial public offering.

So, when you buy a stock it’s an actual share of the company. This process makes you a partial owner of the company. For this reason, stocks are referred to as equity.‚Äč

Stock Buying Guide

Stockbrokers usually assist buyers because you can’t buy stocks directly from exchanges. These stockbrokers let you choose which stocks you want to buy or sell and handle the trade.

There are two main types of brokers to choose from which are full-service brokers or online brokers. Direct stock purchase plans are less common but allow you to purchase shares directly from a company.

Nowadays, getting stock certificates isn’t required but some investors like to have them. They let companies know how to reach you and where to send reports and other relevant information.

What Are Bonds?

Governments, corporations, and other entities that offer bonds are issuing debt to buyers. The entities promise to pay interest to borrow the buyer’s money.

Individual bonds have a specific par value and pay an interest coupon to investors. For example, a $1,000 bond with a 4% coupon pays $40 each year until it matures.

Once a bond matures the full amount of the original principal gets returned to the investor. The bond defaults if the issuer can’t make the payment, but that doesn’t happen very often.

Bonds Buying Guide

Investors purchase individual bonds through a broker or straight from a government entity. Buying individual bonds lets investors lock in a  yield for a set time period. It gives great stability because it doesn’t fluctuate.

Remember that individual bonds have to be bought whole. Bonds are usually issued in $1,000 increments. Make sure to fund your brokerage account balance with the minimum amount to get started with bonds.

U.S. Treasury bonds have a face value of $1,000 but they’re offered in $100 increments. These Treasury bonds get bought using a broker or through Treasury Direct.

Individual bonds types include municipal bonds, corporate bonds, and treasuries. They’re all purchased the same way as either new issues or through the secondary market.

Stocks vs. Bonds

Now you know the key differences between stocks vs. bonds and how they’re each bought. Remember, stocks are a piece of a company and bonds are debt with interest.

Check out our site’s finance section for more helpful tips and useful information.

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