Bond VS Common Stock

 

Explain the main difference between a bond and a common stock.

     First and foremost, a bond and a common stock can be distinguished in terms of its meaning. Stocks known as equity instruments that are traded on stock exchanges and represent an organization's ownership position, as stated by Miller in 2008. When stocks are sold all at once, bonds are swapped in place of the stocks. Hence, we can say that bonds are financial securities that guarantee to repay the principle amount and interest at a later period, which it also considered as a debt. 

    Second, in the issuers term, stocks are only provided by businesses that seek to raise money for expansion projects and future corporate growth, or because the owner wants a sizable lump sum of cash as compensation for the hard work, they have put into building the business. While for the bond, companies, financial institutions, and governments all issue bonds to borrow large sums of money for expansion, acquisition, and other objectives.

    Third, according to 7 Points Comparison of Stocks vs Bonds (2019), a bond and a common stock also have a different risk level. As the benefits are not guaranteed, investment in stocks is substantially riskier than investing in bonds. Every time period might see significant fluctuations in stock values, which could lead your share price to crash to extremely low levels. Investors run the risk of losing more money than they invest if they use leverage to invest in stocks, such as when the investors buy on margin or sell short. In order to effectively manage risk, holding a mix of stocks and bonds in the portfolio is typically advised. Market risk and business risk are the two main dangers associated with investing in stocks. Since they are not completely risk-free, bonds are regarded as a low-risk investment. The most common kind of risk is interest rate risk. If interest rates increase in the country, bond prices will start to fall. Bonds are frequently long-term investments; therefore, inflation is a risk because declining money value over time. Bonds also carry market risk because, in the worst-case scenario, deteriorating economic conditions may prevent firms from making coupon payments or even the principal payment at maturity. 

    Moreover, other salient features are, stockholders have a claim against the property and income of a corporation after all creditors’ claims have been met, while bondholders have a claim against the property and income of a corporation that must be met before the claims of stockholder. Furthermore, stocks do not have a maturity date; the corporation does not usually repay the stockholders, differs from bond whereby the bond have maturity date on which the bondholder is to be repaid the face value of the bond.

    Next, in term of form of returns, stockholders only receive dividend payments if the company reports them. Dividends are paid out to shareholders in the form of the company's profits. Investors are more concerned with the possibility for the stock or price business, or the firm's stock price to increase, when they purchase stocks. The bond shares arrangement, in most situations, requires a predetermined interest payment every six or twelve months. Interest payments are made via coupon payments. 

    Lastly, the difference can also be view in the side of traded over, as mentioned by Balakrushna Padhy (2019). Equities are bought and sold on the stock market at a central location called a stock exchange. On behalf of buyers and sellers, brokers handle it using a sophisticated technological system. Bonds are traded on platforms like the National Stock Exchange, Bombay Stock Exchange, and others, much like equities are. The company that needs to borrow money invites investment banks or the public to buy its bonds in the primary bond market. Bonds are sold to other investors on the secondary market by investors who previously purchased them. Many brokers in the secondary market allow for these trades. In other words, both entities have a different form of market. The stock market is centralised while bonds is OTC (Over the Counter).

References:

7 Points Comparison of Stocks Vs Bonds. (2019, June 12). Yadnya Investment Academy. https://blog.investyadnya.in/comparison-of-stocks-vs-bonds/

Miller, R. L. (2008). Economics today. Pearson Education.

BalaKrushna Padhy. (2019, April 8). Stocks vs Bonds | Top 7 Differences (With Comparison table). Wallstreetmojo.com. https://www.wallstreetmojo.com/stocks-vs-bonds/