Stocks and shares are both purchased for investing money. Like apple and mango both are fruits and both make man strong, but they both are different same is with bonds and shares. Both are an investment, and both make the portfolio of the man very strong. But have different terms. The features of stocks and bonds differ a lot. Starting from its ownership, its payout. There are many differences in this both. We will see about it in detail. Let us first know what is shares and what is bond?
Definition of stock
Stock from the public point of view is an investment that is as a type of asset for them. Whereas stock for the company is a method to increase their capital by making an initial public offering. The place where the sale and purchase of stock occurs is called a stock exchange market. Stockholder bears a risk. There are two types of stock. They are as follows
- Preference stock
- Equity stock
Definition of bonds
Bonds is a debt for them; on the other hand, it is a liability for the bond seller which he has to pay in future according to the promise he did at the time of initial public offering. At the time of the initial public offering, the bond seller promises to pay some interesting time to time to the bondholder. In this way, this interest becomes a periodic income for bondholder. If we consider our country, the companies which are eligible to issue these bonds are as follows
- Central government,
- State government,
- local self-government,
- public sector establishments
- private sector companies
There are various types of bonds. They are as follows:-
- Treasury bonds:- bonds by the central government
- Other Government bonds
- Investment-grade corporate bonds
- High-yield bonds
- Foreign bonds
- Mortgage-backed bonds
- Municipal bonds
The differences between them begin from here,
- The person who owns shares of a company, i.e. the stocks are the owners of the company of which shares belongs. That means they achieve the ownership of company whereas the person having a bond is a creditor for that company, it means the company is liable to pay that amount to its creditor on the other hand company becomes the debtor for bondholder and bond is the debt which will be paid to the bond entity at future.
- No, the question arises who will be paid first at the time of repayment, bondholder or stockholder?
Answering this question, as we know stockholders are the owner of the company, means they bear the risk of profit or loss of the company. First, they have to wait for all the dues to get clear. And in this due the bondholder is one. Hence he will be repaid first.
- Stockholders do not have the guarantee that when they will be paid if the company earns the profit shareholder is provided with the dividend. On the other hand, when it comes about the bondholder, the company need to pay them time to time. There is a fixed interest which is decided at the time of initial public offering. This interest is to be paid periodically. Some of the holders allow the company to delay the interest.
- As the shareholder is the owner of the company, they have a voting right and right to take the decisions for the company and interfere in the company matter whereas bondholders cannot participate in the company’s events and don’t have any voting right.
- Everyone cannot issue a bond or share. It is not like that I can issue a bond to you, or you can issue a bond or share to me. There are proper procedures and rules for this. Companies generally issue stocks, and on the other hand, bonds can be issued by government institutions, companies, and financial institutions, etc.
- There is a different title for the person who has stock and the person who gave bond. The person who is the owners of stocks is called stockholders while the person who has bonds are called as bondholders.
- There is a big difference in the marketing method of stock and bonds. Stocks marketing is done in a centralised trading pattern. Whereas the bond training is done in counter or you can say in a hidden way as per the company.
- Bonds and stock participants differ.
- Participant of the bondholder is:-
- institutional investors
Whereas the participants of the stockholder are:-
- Market maker,
- Floor trader,
- floor broker
There are various derivatives of both stock and bond. They differ from each other.
Bond derivatives are
- Bond option,
- Credit derivative,
- Credit default swap,
- collateralised debt obligation,
- collateralised mortgage obligation
Whereas stock derivatives are
- Credit derivative,
- Hybrid security,
- There is a various method to analyse these bonds and hares. The methods differ for them both. For bonds the yield analysis methods are
- Nominal yield
- current yield,
- Yield to maturity,
- Yield curve,
- bond duration,
- Bond convexity
On the other hand for stocks the methods used are as follows:-
- Gordon model,
- dividend yield,
- Income per share,
- Book value,
- Earnings yield,
- Beta coefficient
- One interesting feature told when describing IPO meaning is that bonds can be changed to shares, but shares cannot be changed to bonds. This is a huge difference between them.
Stocks and bonds both are traded on a public exchange an initial public offering is done for both, but there is a difference between both. Hope you finally got the difference between bonds and stock. The difference between them for purchaser begins from the initial public offering only. They are the belongings of same species I,e financial asset just they have different features. The point where it differs is ownership, risk bearing, payouts, payments, selling process, their yield analysis etc.