Stocks vs. Bonds: What’s the Difference?
Investing can feel overwhelming, but understanding the basics of stocks and bonds can help you make smarter choices with your money. Let's break it down in simple terms!
Stocks: Owning a Piece of a Company
When you buy a stock, you're basically becoming a part-owner of a company. It's like owning a small piece of that business.
If the company does well, the value of your stock can go up. Some companies also pay you a share of their profits, called dividends.
Key Points about Stocks:
Growth: Stocks can grow a lot over time, especially if the company does well.
Changes: The value of stocks can go up and down a lot, depending on what's happening in the world.
Extra Money: Some companies give you extra money, called dividends, as a thank-you for being a shareholder.
Say in Decisions: As a shareholder, you might get to vote on important company decisions.
Bonds: Lending Money for a Return
Bonds are like loans. When you buy a bond, you're loaning money to a company or government. In return, they promise to pay you back the amount you lent, plus interest over time.
Key Points about Bonds:
Regular Income: Bonds give you a steady income from the interest they pay.
Safety: Bonds are generally safer than stocks because you're more likely to get your money back.
Time Limits: Bonds have an end date when you get your money back. Some are short-term, and others are long-term.
Risk: There's a small chance the borrower won't pay you back, but it's usually pretty low.
Making Smart Choices:
Deciding between stocks and bonds depends on what you want to do with your money. If you're okay with a little risk and want the chance to make more money, stocks might be right for you. But if you want steady income and less risk, bonds could be a better choice.
Before you start investing, think about what you want to achieve and how much risk you're comfortable with, and continue to do research to understand what types of investments are best for you.
KEY TAKEAWAYS:
Stocks offer ownership in a company and growth potential, while bonds provide regular income and safety.
Stocks come with higher risk and potential returns, whereas bonds offer stability and predictable income.
Choose between stocks and bonds based on your goals, risk tolerance, and time horizon to create a personalized investment strategy.
Most people invest in mainly stocks (often via index funds or ETFs) when they’re young, and slowly shift to investing in bonds as they near retirement. This way they can benefit from the higher returns from stocks while also minimizing risk as they near the age when they need to start cashing out to use their nest egg.
You can easily sell stocks/ETFs/index funds and switch to investments that contain more bonds at any time.
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
