What’s the Difference Between a Stock and a Bond?

Owning stocks, or shares of stocks, is equivalent to having equity or ownership of a company. For example, if you buy 5,000 shares at $2 of a company valued at $100,000 then you own ten percent of the company. Stocks sometimes pay a dividend, or a small monetary reward, to ensure shareholders to continue to invest in this company. Being able to offer a dividend in the first place is an indicator that a company is profitable and has spare liquidity (cash supply).

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Purchasing bonds, on the other hand, are similar to purchasing an “IOU” from a company; when you buy, you act as a bank and loan your money to a company, city, or government. The end goal of buying bonds is the company will become profitable enough to pay back the original value and usually added interest. While bonds do not offer dividends, they are usually less risky than stocks given the volatility of shares of stocks—volatility is a measurement of how likely and to what extent the price of a stock will increase or decrease in a set amount of time.

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