What is the difference between a stock and a bond?

A stock represents ownership in a company, meaning when you purchase a stock, you are buying a small part of that company. This ownership can come with voting rights in company decisions and the potential to earn dividends if the company profits. Stocks tend to be riskier as they are susceptible to market volatility, but they also have the potential for higher returns over the long term.

On the other hand, a bond functions as a loan made by the investor to a borrower, usually a corporation or government. When you buy a bond, you are essentially lending money and in return, you receive interest payments, known as coupons, and the promise that the principal amount will be returned at the bond’s maturity date. Bonds are generally considered safer than stocks, particularly government bonds, though they typically offer lower returns.

Recognizing these distinctions is crucial for personal financial management and investment strategies, as it influences risk tolerance and potential returns. Understanding that a stock grants ownership while a bond signifies a loan helps investors make informed decisions aligned with their financial goals and risk appetite.