What is the difference between stocks and bonds?

Asked by Sally

1 Answer

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Answered by pete
Stocks is a catch-all term, so I presume you mean Shares by this.

A share is a tiny slice of a company. If you are a shareholder you have certain rights, like the right to vote on matters that concern the running of the company, and possibly, the right to a dividend if the company is profitable.

A bond on the other hand is an IOU. If a company needs to raise money, it can ask to borrow it. Assuming I want to lend money to such a company, they will issue me with an IOU for the amount I have loaned. While they have my money, the company will pay me a fixed amount of interest, called the coupon. this is why bonds are sometimes called fixed interest investments.

So far, so simple. But a smaller company might be more likely to default on any loan I make to them. So in order to attract lenders they may have to offer a higher rate of interest, which can be lucrative to me the lender.

A high level of interest may be attractive to another investor, who may buy the bond off me for more than the amount I lent to the company,so I make a profit. this is how bonds fluctuate in value: they are traded on the stock market like shares.

Bonds are easier to hold than they are to explain. I might do a video later as these things can be easier said than written sometimes!

| 12.06.10 @ 21:04
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