A stock is a security in the equity market, while a bond is a security in the bond market. Equities and bonds are the most popular asset classes that investors turn to while making their investment portfolios. Both the asset classes have different risk, return, volatility and liquidity features. Hence they are suitable for different types of investors. Equities are high-risk investments, thus ideal for investors with high-risk tolerance levels. On the other hand, bonds are comparatively less risky than equities. Therefore, they are suitable for investors with low-risk tolerance levels. This article covers in detail equities vs bonds.
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What are Equities?
A company issues equities to raise capital at the cost of diluting its ownership. Investors can purchase units of equity shares to get part ownership of the firm. By purchasing the equity shares, investors will be contributing towards the total capital of the company and becoming its shareholder.
What are Bonds?
A bond is one of the fixed income investment products that represents a loan given to a borrower by the investors. The investors get interest income in return for the money they lent. A bond includes details of the loan like the date when the principal payment is due, the interest and the terms of interest payments.
Difference Between Bond and Equity
Following are the critical differences between equities vs bonds:
|Basis of Difference||Bonds||Equities|
|Types||Government Bonds, Corporate Bonds, Municipal Bonds, and Asset-Backed Securities.||Ordinary Shares, Preference Shares, Bonus Shares, Sweat Equity, and Employee Stock Options (ESOPs).|
|Type of Return||Fixed Income||Dividends and Capital Appreciation|
|Return||Bonds offer fixed income. The interest rate for a bond is set, and also the payments are made regularly. Interest payments are made via coupon payments.||While investing in equities, investors are more concerned about the stock’s capital appreciation. |
Equity holders earn dividends from the profits a company makes. However, it is up to the company to pay dividends.
|Risk||Bonds are a low-risk investment, but they are not entirely risk-free. The most common sort of risk is interest rate risk. If the interest rates rise, bond prices will begin to fall. Furthermore, bonds are long-term investments and thus are subject to inflation risk. Over the long term, the returns may not be high, and the value of money decreases over time.||Equity investing is much riskier than bond investing because the returns are not guaranteed. Stock prices can fluctuate dramatically over time. Market risk and business risk are the two main risks associated with Equities.|
|How Do They Work?||Companies and governments issue bonds to finance their projects or operations. The bonds are issued over the counter and later traded on the stock exchange until their maturity.||Companies offer their shares to the general public through Initial Public Offering (IPO). After the IPO allotments, the shares trade on the stock exchanges.|
|Liquidity||Less liquid in comparison to equity shares.||Highly liquid instruments. Thus, they can be easily bought and sold on the stock exchange.|
|Issuer||Governments, financial organisations, and corporations, among others, issue bonds to borrow large sums of money for expansion, acquisition, or other objectives.||Equity stocks are only offered by companies that seek to raise money for expansion projects, further corporate growth, or dilution of owner’s shares.|
|Ownership||Bondholders are creditors to the company.||Equity holders own part of the company.|
|Payment in case of Bankruptcy||Bondholders are given preference in case the business goes bankrupt. In other words, while liquidating a business, the bondholders are paid first.||Equity holders receive money after all the debt obligations are met.|
|Participants||Bond issuer, brokers and investors||Investors and Brokers|
|Trading||You can buy bonds in the primary market or secondary market. On purchasing the bonds in the primary market (over the counter), you can also trade them in the secondary market before their maturity.||Stocks trade on the stock exchanges. For example, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).|
|Suitability||Suitable for conservative and low-risk tolerance investors.||Suitable for high-risk tolerance and aggressive investors.|
|Investment Tenure||Institutions issue Bonds for long durations.||A long term investment duration is advisable to average out the market volatility.|