Difference between Stocks and Bonds
Is there any difference between stocks and bonds?
When investors buy shares of stock, they buy part rights in a corporation. The value of that corporation’s stock will tend to reflect the earnings of the firm – up during profitable periods and down during periods of loss. The main difference between stocks and bonds is that stocks make no promises about dividends or returns.
Bondholders do not share in a company’s profits. When a company issues a bond, it guarantees to pay back the principal (the face value) plus interest. If investors buy the bond and hold it to maturity, they know exactly how much they are going to get back. This is why bonds are also known as ‘fixed-income’ investments – they assure investors a steady payout or annual income.
Stocks represent ownership of companies . For example, ABC Company, which is a publicly traded company, is divided into 1 million shares. Jane buys 1,000 of those shares. She would then be a .01% shareholder of the ABC Company. As a result, Jane shares in both the profits and losses of the company.
Bonds represent loans made to the companies .For example, ABC Company needs funds to open a few more branches globally, but they do not want to divide the company any further. Selling bonds would seem to be an option to them instead of issuing stocks. If Jane buys bonds from them, she becomes a creditor of the ABC Company who will be paid back over the life of the bond.
What are US Government Bonds?
The bonds issued by the US Government are called Treasuries. Treasuries are regarded as the safest bond investments as they are backed by the US government. Yet another advantage of Treasury is that the income an investor earns is free from state and local taxes. US Treasury securities are a great way to invest and save for the future. The following are the investment options available with US government bonds:
US Treasury bills with maturities from 90 days to one year. These bills are sold at a discount from their face value. For instance, you might pay $950 for a $1,000 bill. When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest.
US Treasury notes with maturities from two to 10 years. These pay interest every six months until maturity.
US Treasury bonds with maturities from 10 to 30 years. Like Treasury notes, Treasury bonds pay interest every six months.
Treasury Inflation-Protected Securities (TIPS) provide protection against inflation. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal. So, like the principal, interest payments rise with inflation and fall with deflation. When a TIPS matures, investors are paid the adjusted principal or original principal, whichever is greater.
Savings Bonds are a low-risk, liquid savings product which can help supplement the retirement income. These bonds protect the investors from inflation and investors earn interest while they own the bonds.
EE/E Savings Bonds earn a fixed rate of interest. The interest accrues monthly and compounds semiannually.