What is the Difference Between a Stock and Bond?

A  financial advisor Bethesda MD residents turn to for advice may frequently refer to  “stocks” and “bonds.”Experienced investors may have an idea of their meaning, but those new to this realm, as well as the general public, could benefit from understanding the difference. Luckily, the answer is pretty straightforward, and knowing these terms can better prepare you for a free consultation with a financial advisor Bethesda MD has to offer.

What Is a Stock?

A stock is a share of a company, which represents partial ownership of the corporation, and can be bought or sold. Essentially, stock is equity, or the value of ownership interest in a corporation or business. Stock can be divided into pieces which are called shares; however, the terms “stock” and “shares” are often used interchangeably. Part of the role of a financial advisor Bethesda MD respects may include the analysis or management of investment shares in a company.

Without getting into a lot of technical detail, stocks allow a corporation to finance itself by raising money and avoiding debt. A financial advisor in Bethesda MD may refer to this as equity financing. When a company has stocks, they will be released, sold, and resold on secondary exchanges. In the U.S., these are the New York Stock Exchange and NASDAQ. Stock investors are able to buy and sell stocks on these exchanges; however, knowing the right time to do so is imperative to turning a profit. The expertise and advice of a financial advisor Bethesda MD residents trust may assist you in the decision to invest in stocks, which can further your potential to make smart choices.

What Is a Bond?

As an investor, you may be recommended to divide your equity between stocks and bonds. Where stock is a stake of an ownership, bonds are a debt. When a company sells stock, it is selling a piece of itself for cash. When a company issues a bond, it is issuing debt with an attached agreement to pay interest on it.

Essentially, a bond is a loan. When an entity, corporation or government issues a bond, they are looking to raise money from investors. These investors are the lenders who give the entity money, based upon a signed contract that they will receive their investment back in the future, as well as accumulated interest held to the bond.

To better understand bonds and why the advice of a financial advisor Bethesda MD investors rely on may be necessary, consider the following example. A company wants to raise $1 million and chooses to issue 10,000 bonds worth $100 each. Investors who buy these bonds will receive $100 upon maturity, or the date on which the bond can be redeemed. Along with the bond will come accumulated interest, which is how many investors make money. If the bond has a maturity of 1 year and an annual interest rate of 2%, the investor will receive $100, plus $2 in 1 year of accrued interest.

Considering the Difference between Stocks and Bonds

When you invest in stocks, you share the profits and losses of the company. Therefore, when it makes profits, you also make a profit. However, when the company is not performing well, the stock value decreases and you lose money. In the short term, stocks are not often the go-to choice for investors, but they do hold merit for long term goals. A financial advisor Bethesda MD residents turn to may be able to offer advice on the overall stock market, potential risks, and long term returns.

Bonds are typically preferred by investors who are seeking profit, or income, in the near future. They’re also are generally less risky, with the vast majority of bonds paying the full amount of accrued interest at maturity.

Which is Right for You: Bonds or Stocks?

Bethesda MD financial advisors may help their clients to invest in both stocks and bonds. Which one is right for you will likely depend on a number of factors, including: when you wish to see a net profit, your tolerance for risk, and your investment goals.

In any case, investing in stocks or bonds is a precarious measure, which should be overseen by a skilled financial advisor Bethesda MD residents respect.