The main differences between stocks and bonds

Many beginner investors are interested in the question, what are the differences between stocks and bonds? We will try to explain this issue in an accessible way, since both types of securities are more active than others on stock exchanges.

Stock - a particle in the share of the enterprise

Differences between stocks and bonds is that the former represent a certain share in the authorized capital of the joint-stock company. They give the investor a percentage of the company's profit in proportion to the number of shares. For example, a certain company produces cars. The number of shares that are in the share capital is 10 thousand. The investor has acquired 10 in the stock market. The annual profit of the company amounted to 10 million rubles (multiple figures are taken for ease of calculation). Consequently, one share gives the right to dividends in the amount of (10 million / 10 thousand) 100 thousand rubles. Total for the investor, the total profit amounted to 1 million rubles. (10 shares x 100 thousand rubles).

Bonds are debt obligations that are guaranteed by a company through the intermediary of the exchange on which they are quoted. In fact, they are no different from debt receipts which one person can write to another when borrowing money. However, the fundamental difference is that bonds can only be bought or sold through mediation. stock brokers. This provides an additional guarantee for investors, and the status of securities is for debt obligations.

What is the difference between stocks and bonds for a buyer (investor)

The main differences between these securities for the investor are as follows:

• The share involves the ownership of a share of the authorized capital. The more these securities an investor has, the more influential he is for making decisions in the company.
• Income from stocks depends on stock fluctuations, speculators, company development, etc. Their daily course is different, and it is impossible to predict how much they will cost tomorrow or in a month. Bonds - a certain fixed income that the investor knows in advance. It is not subject to any stock fluctuations. The buyer of bonds already knows in advance how much he will receive in a year of ownership.

These are the main differences between stocks and bonds.

Closed and open joint stock companies

All joint stock companies whose authorized capital consists of shares are divided into:

• Open (OJSC) - securities are freely sold and bought on stock markets.
• Closed (CJSC) - change hands only among “their own”, “random people from the street” are not allowed here.

Profitability

Differences between stocks and bonds are also in the distribution of profits. When purchasing OJSC securities, you need to carefully analyze the market and the company: the development of the company, investments, financial indicators, the state of the industry as a whole, etc. It is from the company's rate, from its profit, that dividends will go, which means that the cost of securities will increase, and, conversely, the lower the company's income, the cheaper the stock market is quoted.

Return on shares may be due to two sources:

1. Dividends on company profits.
2. When selling securities on stock exchanges, that is, speculative operations.

Bond Yield:

1. Due to the higher face value.
2. From the coupon, that is, the interest that investors are paid after a certain amount of time.
3. Resale on the stock exchange.

The first and second points are agreed immediately, that is, the investor does not need a fundamental analysis of the markets. Prices are fixed and cannot be changed. The only risk is to lose capital if the company declares bankruptcy, but this risk is also present when buying shares.

Differences between stocks and bonds: pros and cons

Pluses of shares:

• You can predict the market and buy stocks at the lowest price, quotes of which may subsequently grow.
• Two sources of income, which is a larger percentage compared to bonds.
• They give the right to the authorized capital of the enterprise, and, therefore, the investor automatically becomes a founder.

Cons of shares:

• An investor who does not feel the state of the market, a certain sphere, and also does not analyze the development of companies, can invest in unprofitable companies that are doomed to ruin.
• There are no guarantees in making a profit, as well as dividends.

Bonds advantages:

• It does not require fundamental market analysis. nominal cost shares and coupon interest are fixed, not subject to market fluctuations.
• Guaranteed profit.

Cons of bonds:

• Low yield compared to other financial instruments, which is slightly higher than bank deposits and inflation.
• The bonds do not imply a share in the authorized capital of the enterprise, no matter how much the investor buys securities.

Thus, in general terms, we tried to explain what is a stock and bonds, what is the difference between them. Of course, in order to better understand these financial instruments, as well as develop your own stock trading strategies, you need to find fundamental information about them.