Investors have an array of options in today’s market to choose from for making sound investments and maximizing their profits at manageable risks. It is common knowledge that investing in shares is relatively riskier than other instruments like debentures of FDs or bonds. Bonds and stocks are both distinct investment products that make an excellent and balanced portfolio.
Given below are the basic meaning and differences between the terms stocks and bonds.
Shares are one of the most common forms of investment for investors. By investing in the shares of a company, investors can be part of the ownership of such a company to the extent the shares are invested by them. The investor has limited liability to the extent of the face value of the shares and their total investment in the company. These shares can be invested through buying shares from the open market or by subscribing to them at the time of the IPO.
Shares can be issued by public limited or private limited companies as a way to raise capital. Having the shares of the company allows the shareholders to have voting rights along with ownership rights.
Investment in shares provides investors dual returns in the form of, in the form of dividends and capital gains when the shares are sold. Equity shares have the potential to generate the highest returns for investors in the long run. Shares are essentially categorized under two main criteria namely ordinary shares and preference shares. Share market further classifies the stocks based on the market size of the company, nature of the company, sector to which the company belongs, stocks based on growth or dividend model, etc.
What is the meaning of bonds?
Bonds are another way that a company can raise funds for their business either for the short-term or long-term duration. Bonds can be issued by the government as well as corporates and help investors by being a fixed source of income. Bonds are relatively less risky than shares making them an excellent addition to the portfolio of risk-averse investors.
When a bond is issued by its issuer, it represents an agreement between the issuer and the subscriber wherein, the issuer agrees to pay back the capital investment upon maturity of the bond. The issuer also agrees to pay interest to the subscriber at the agreed fixed rate till the maturity of the bond. This interest is paid annually, semi-annually as per the agreement between the issuer and the subscriber of the bond. These bonds are traded on the primary market as well as on the Over The Counter market. The price of the bond will depend on the demand for the bond and the creditworthiness or the credit quality of the issuer.
Some of the common types of bonds that are available in the market are government bonds, corporate bonds, treasury bonds, zero-coupon bonds, etc. These bonds can be traded on the bond markets also known as the credit market. Investment in bonds results in gains in the form of interest at a fixed rate agreed at the time of issuing the bond as well as capital gains upon redemption.
Types of bonds and stocks
Here are the commonly available types of bonds and stocks:
| Types of Bonds | Types of Stocks |
|---|---|
| 1. Government Bonds: Issued by the Indian government, providing fixed interest payments to investors. | 1. Blue-chip Stocks: Shares of well-established, financially stable companies with a history of consistent growth. |
| 2. Corporate Bonds: Issued by private corporations to raise capital, offering fixed or floating interest rates. | 2. Small-cap Stocks: Shares of small-sized companies with higher growth potential but increased risk. |
| 3. Municipal Bonds: Bonds issued by local government entities to fund public projects, with interest payments. | 3. Dividend Stocks: Shares of companies that distribute a portion of their profits as dividends to investors. |
| 4. Debentures: Unsecured bonds issued by corporations, providing fixed interest payments, often with longer terms. | 4. Growth Stocks: Shares of companies expected to experience significant growth in the future. |
| 5. Convertible Bonds: Bonds that can be converted into equity shares of the issuing company at a later date. | 5. Value Stocks: Shares of companies considered undervalued relative to their intrinsic worth, offering potential for future price appreciation. |
Shares and bonds are good investment options for investors to make a balanced portfolio. Investors can select quality stocks and bonds that can help them maximize their wealth at the same time mitigate the overall risks. These investments can be suitable for retail investors as well as institutional investors depending on their risk appetite and returns perception. Stocks are more suitable for investors with a higher risk appetite and a long-term investment horizon. On the other hand, bonds are preferred by investors that have a lower risk appetite and a need for fixed income throughout the tenure of the bond.
There are few basic differences between shares and bonds that are highlighted hereunder.
| Category | Shares | Bonds |
| Meaning | Stocks are the financial instrument that is issued by the public limited or private limited companies as a way to raise capital and provide ownership to the shareholders. | Bonds are also a financial instrument that can be issued by corporates as well as the government. It represents the debt portion in the company and is relatively cheaper to raise as compared to equity |
| Risks | Investment in stocks is considered to have the highest risk as compared to any other instrument | Bonds are relatively safer, especially government bonds, as the investor is assured of the return of their investment at the time of redemption. |
| Returns | The returns from stocks are dual in the form of dividends and capital gains at the time of sale of investment | Returns from bonds are the form of fixed interest as well capital gains at the time of redemption of investment |
| Ownership | Investment in stocks provides ownership status to investors | Investment in bonds does not provide any ownership status to investors |
| Closure of investment | The closure of an investment in stocks depends on the investor based on the various factors like the achievement of goals, market fluctuations, etc. | The tenure of the bond is fixed at the time of issuing it and the investment is redeemed when such tenure is met. |
| Participants | Stocks are bought and sold on the stock market and its participants include investors, brokers, traders, and market makers. | Bonds are bought and sold on the bond market and their participants include institutional investors, retail investors, speculators, underwriters, etc. |
| Perks | Investment in stocks provides the investors with ownership of the company and voting rights. | Investment in bonds provides the investors a priority in getting their returns (interest income) from the company profits as well as at the time of winding up of the company |
| Taxation | Dividends from stocks is taxed in the hands of the investors at their applicable slab rates. STCG on stocks is taxed at the rate of 15% whereas LTCG is taxed at 10% after the initial exemption of up to Rs.1,00,000 | Interest income from bonds is taxed at the applicable slab rates along with STCG on bonds. LTCG on bonds is taxed at the rate of 20% after the benefit of indexation. |
Conclusion
Bonds and shares are an excellent investment option for investors and a good addition to any portfolio. It will help the investor mitigate the risk as well as increase the overall returns. Investors must consider many factors before choosing their investment to make an informed decision and ultimately maximize their wealth.
FAQs
Bonds are usually held by investors having a long-term investment horizon.
The risks of an investment in bonds include credit risk, inflation risk, liquidity risk, default risks, etc.
The risks of an investment in shares include systematic and unsystematic risks like market fluctuations, credit risks, changes in the political or economic scenarios, etc.
An ideal portfolio of an aggressive investor will predominantly include investment in equity shares. The risk of this investment is balanced or mitigated by investment in bonds or other debt instruments.
No. Dividends declared per equity share are based on the management discretion. Also, a company is not obligated to declare dividends every year.
