Stocks and bonds are the two most fundamental building blocks of investing. They represent two very different relationships with the entity raising money: ownership versus lending.
Stocks: owning a slice of a company
When you buy a stock (also called a share or equity), you become a part-owner of the company. If the company grows and becomes more profitable, the value of your shares may rise — and some companies share profits with owners through dividends. If the company struggles, the share price can fall, and shareholders are last in line if the company fails.
Bonds: lending money
When you buy a bond, you lend money to a government or company for a fixed period. In return, the borrower typically pays regular interest and repays the original amount (the principal) when the bond matures. Bondholders are creditors, not owners — they generally get paid before shareholders if the borrower runs into trouble, but their upside is limited to the agreed interest.
Risk and return
Stocks have historically offered higher long-term returns than bonds, but with much larger ups and downs along the way. Bonds are generally steadier but offer lower expected returns, and they carry their own risks — including the risk that the borrower cannot repay, and that rising interest rates reduce the market value of existing bonds.
How they work together
Many investors hold both, adjusting the mix to suit their goals and tolerance for volatility. A common principle is that money needed soon should lean toward steadier assets, while money invested for the distant future can tolerate more of the stock market's swings. Diversification — spreading investments across many stocks and bonds — reduces the impact of any single failure.
This article is general educational information, not investment advice. Consider speaking with a licensed financial professional before investing.