What are the Major Differences Between Shares and Bonds?

In the prevalent dynamic environment, everyone strives to one-up their earnings, lifestyle, and quality of life. It is very difficult to cope with the ever rising expenses in this time of inflation. Due to demonetization and the subsequent introduction of GST in India, everyone is struggling to survive and adapt to the recent changes in the financial environment.

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As it gets very difficult to survive only on a single income source, it is very important for everyone to invest in various investment instruments to add to their wealth. People tend to generally invest in bonds, equity shares, saving schemes, mutual funds, and fixed deposits. The various advantages of these investments are-

  • They act as an additional source of income.
  • They safeguard the future interests of the investor.
  • They help imbibe a habit of saving and aid in wealth creation.
  • An investor has the option to select an instrument based on his personal probable needs in the future, making his future secure.
  • Investment instruments help in planning for the future well in advance, thus provide a good quality of life.

 Nowadays, the two most favored investment options by investors are:

  • Shares
  • Bonds

Shares

Institutions looking to raise capital, issue a part of the ownership of the company in return of a value. This is done by the means of issuing of shares to general public. In exchange for providing a specific value, the investor is entitled to the ownership of the company in proportion to the actual value of the company.

Features of shares-

  • They are issued by Public Limited Companies which have been listed on the stock exchange. The shares issued by public limited companies are open for sale and purchase by everyone having a dematerialization account with any financial institution dealing in securities.
  • The value of these shares is affected by multiple factors. Some of these factors are market trends, new projections of the company, growth patterns, demand and supply of the stock and many other implicit factors.
  • Shares are a medium for raising finance for company expenses, growth, and asset building.
  • The value of profit that can be reaped from an investment in shares is unpredictable and uncertain.
  • The owners of the shares of a public limited company are known as stockholders. They have part-ownership of the company and this makes them an active voting member in deciding the matters of the company.
  • Other than the profits earned by a rise in the share price due to favorable market conditions, the returns provided by a profit-earning company to its shareholders is in the form of dividends. Dividends are payouts given by a public limited company to its shareholders out of its profits.
  • In case the company, of which an investor has bought the shares, is not making profits and books a loss in a financial year, then the shareholder shall not earn any dividend on the investments.
  • The main platforms for trading stocks in India are-
  • National Stock Exchange (NSE)
  • Bombay Stock Exchange (BSE)       

Bonds

Bond is a type of investment which acts as a fixed-income-reaping investment. The amount invested in bonds acts as a loan for the issuing institution. This institution uses the money so raised for its current as well as long-term expenses. The bondholders reap regular interest on their investment as well as are offered a surety of repayment of their invested amount.

Features of bonds-

  • These instruments of investment are largely issued by private companies, government institutions, and financial institutions.
  • Bonds are debt instruments which make the institution issuing the bonds a debtor to the person investing in a bond. Thus, the investor becomes a lender to the bond-issuing institution.
  • The owners of bonds are known as bondholders.
  • Institutions issue bonds to raise finance for current expense as well as expansion purposes.
  • The bondholders are entitled to an interest at pre-decided intervals until the maturity of the bond. At the time of maturity, the institution pays back the debt issued initially at the time of purchase of the bond.
  • The investments made in bonds bear a very low-risk element and are given a repayment preference.
  • The popular types of bonds are-
    • Public Undertaking bonds
    • Corporate bonds
    • Tax-­saving bonds
    • Emerging markets bond
    • Banks
    • Other financial institutions

The basic differences between shares and bonds can be easily illustrated in the table below.

Stocks vs Bonds

Feature

STOCKS

BONDS

1.)    Definition

Investment instruments which provide part ownership of a public limited company in exchange for a monetary value.

Investment instruments which act as a borrowed capital for the institution/organisation issuing them.

2.)    Utility

Money raised through the means of shares is utilized for the company’s growth and current expenses.

Money borrowed through the means of bonds is utilized for long-term development and asset building.

3.)    Return of initial investment

Not guaranteed

Guaranteed

4.)    Profit earned on investment

Not fixed

Fixed

5.)    Term for return earned

Dividend

Interest

6.)    Source of purchase

Stock Exchange

Government Institutions

Financial Institutions

Private Institutions

Public Undertakings

7.)    Status of investor

Part-owner

Lender

8.)    Risk on investment

High

Very Low

9.)    Time of maturity

Depends on the investor

Fixed at the time of purchase

10.)  Type of Investment instrument

Equity

Debt

The above-mentioned table clearly illustrates the basic differentiating features of between the two most popular instruments of investment, namely stocks and bonds.

In favorable times, shares may earn higher returns than bonds, for which the returns are pre-decided. On the other hand, bonds seem to be a much safer investment considering the volatility of the share market.

Depending on the risk appetite, liquidity restraint, investment amount and the purpose of investment, an investor can carefully access where to invest his finances.

Written By: PolicyBazaar - Updated: 30 June 2021

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