Shares vs Bonds
Shares and bonds are two words that hold great significance for investors. Shares and bonds are two important tools of investment that form the portfolio of any investor at any given point of time. From the point of view of a company, these are means to raise equity from the market. Both are bought and sold in stock markets and are important forms of investment for common people. The words are often confusing and people find it hard to differentiate between the two. This article intends to clarify all the doubts surrounding the concepts of shares and bonds.
Companies usually divide their capital into small parts of equal value. This smallest part is known as a share. Companies usually issue shares in the public to raise capital. People who buy or are allotted shares are called shareholders. Shares are paper certificates representing part ownership in a company. If a company issues millions of shares and a person has a few shares of the company, he is said to be a part owner of the company. Shares do not have a time period which means they are for perpetuity or as long as the company lasts. It is their value that keeps on changing depending upon the performance of the company.
When a company decides to go public, it issues shares that have a face value. Say for example a company issues shares of denomination $1, but in period of time and good performance of the company the share prices go up to $5. This means that a person who has a share of the company owns $5 in the company and he can sell if for that money whenever he so desires.
Bonds are loans made by common people to a company and the company has to pay specified interest to the bond holder till the maturity of the bond. The company also has to repay the principal amount that has been loaned. It is in essence a contract between a person and the company whereby company agrees to pay interest in lieu of loan made by the person. Bonds are instruments used by any company to raise capital from the public. Bondholders use these certificates as a form of investment in a company and they are guaranteed to get interest payable yearly or half yearly from the company.
In the case of bonds, the company is the issuer while a common man is the investor. A bond can be termed as an IOU between a company and a person. Bonds are fixed income securities as they provide a fixed income in the form of interest till the time of their maturity. Bondholders have no say in the internal matters of a company but company treats them at a priority when payment of interest is concerned.
Difference between shares and bonds
Many people do not understand the difference between shares and bonds. Though it is true that both are tools of investment and for a company means to raise capital, but there are glaring differences between the two. Here is the summation.
|Shares vs. Bonds
1. Shares are equity and represent ownership in a company while bondholders have no stake in the company except that they are entitled to interest from the company.
2. Bonds are debts to the company and bondholders are the first to receive their money back in case a company dissolves.
3. Bonds are relatively safer but pay lower returns on investment. Shares can be volatile but also carry higher rewards.
4. Shares are for perpetuity or as long as the company lasts whereas bonds are for a limited time period and have no value after the completion of the term.
For a safer investment, any investor is well advised to keep both shares and bonds in his portfolio.