Difference Between Bond and Stock
The difference between a bond and a share lies in the risk, the profitability, the maturity and the rights that are acquired. The return, the risk and the rights that are acquired are lower in a bond than in a share.
It is very important to know the differences between bonds and stocks, because they really are two totally different assets. In finance, both the bond and the stock are considered financial assets . We are going to explain what each one of them consists of and then we will look for similarities and differences between the two.
When we buy a bond , we deliver an amount of money (the capital of the operation) to the issuing entity of the bond, which agrees to return it to us at the end of the established term, together with a percentage of interest (the benefit that we will obtain from this operation).
The company issues that debt through bonds so that it can be purchased by the general public. Feature that makes the issuance of bonds something almost exclusive to large companies.
On the other hand, a share represents an aliquot part of the share capital of a Public Limited Company. By acquiring shares we are obtaining the category of partner, contracting certain rights and obligations.
Our decision-making capacity will depend on the percentage of the share capital that our shares represent. If the company obtains benefits, we can participate in them through the dividends received.
Joint analysis of the bond and the share
Buying a bond is offering a loan to the company that issues it. From the point of view of the issuer of the bond, the amount lent is placed on the liability side , because it is debt.
While with the shares, we are acquiring part of the company and we become partners. For this reason, for the company, the capital invested in shares is located in its share capital, within the net worth , as it is the capital paid up by the owners of the company: the partners.
Fixed income vs. equities
The performance of the bond is independent of how things have gone for the company. It is a fixed-income instrument because we know in advance that we are going to receive interest, which can be fixed (agreed when contracting the bond) or variable (based on a reference index such as the Euribor ). The bond does not give us the right to vote, the holders of the bonds are merely creditors of the company.
Shares, unlike bonds, are a variable income instrument , which means that there is no contractually established economic remuneration for the shareholder, but rather it will depend on the situation that the company is going through. If the company deems it appropriate, it will distribute dividends (yield on the operation), otherwise we will not receive any remuneration but we will continue to be partners as long as we hold the shares.
One of the non-economic characteristics of bonds is that they do not have decision-making power. Another important characteristic of the bonds is found in the term of the operation. These agree on a period during which the contract is in force. The shares are perpetual, you own the shares as long as you don't sell them.
To conclude, we present in a table the different nuances that make the difference between bonus and action. Actually, it is a summary table of the concepts explained in the previous paragraphs, as well as in the linked articles.