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Difference between Stocks and Bonds
You may have heard of stocks and bonds but are unsure of what makes them different. While both can help grow your money, there are several important differences between them. The video and resources below will help explain these differences and how investing in each can help you reach your financial goals.
Key Takeaways
- Stocks are ownership shares in a company, while bonds are a kind of loan from investors to a company or government.
- To make a profit from stocks, you’ll need to sell the company’s shares at a higher price than you paid for them or receive regular dividend payments from the company while bonds generate income through regular interest payments.
- Bonds typically pay a low rate of return, while returns associated with stocks can be higher.
- Stocks tend to be riskier investments because they can fluctuate a lot in value over time.
When you buy a stock, you’re buying a small part, or share, of a company. If the company does well, the value of its stock will go up allowing you to sell it at a profit. Some companies also share a portion of their profits with stockholders as dividends. The total amount of dividends you receive will depend on the number of shares you own. Owning a company’s stock may also provide other benefits, such as letting you vote in certain company decisions.
When you buy a bond, you’re loaning your money to the company or government that issued it. In return, you’ll receive regular interest payments in accordance with the terms of the bond you purchased. Interest payments are typically made on a pre-determined schedule, providing investors with a reliable source of income. And when the bond matures, your initial investment will be paid back to you in full. Unlike stockholders, bondholders don’t receive dividends and can’t vote in company decisions.
Selecting your investments goes hand in hand with your account type and your appetite for risk. Many investors diversify their investments across different asset classes to help maintain a balanced portfolio. You can also check out this article that highlights things to consider when investing your money.
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