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There are many people who want to start investing money, but financial terminology can be confusing. Here at IQG, we would like to make it easier to digest by rolling out a series of terminology explanations for you. Understanding the terminology is a good first step when considering how best to save and invest your money, diversify your assets, and achieve specific financial goals. In this article, we will explore the fundamental differences between stocks and bonds.
Definitions
To begin, let us look at the term definitions that illustrate the main difference between them.
A stock is an equity instrument, which simply means that it is evidence of ownership rights in a company. If a company issues stock (also referred to as ‘shares’), it is essentially selling a portion of its ownership. For example, after three years of successful operations, ABC Bahamas Company wants to expand its business but is unable to do it because of a lack of financial resources. The company decides that it wants to raise funds through what is known as an initial public offering or IPO that entails selling a portion of its company to the public. If you decide to purchase ABC Bahamas Company’s stock, you would be considered a partial owner (shareholder) in the company, even if your purchase is very small.
On the other hand, bonds are debt instruments, which simply means that if you purchase bonds, the issuing entity owes you money. Both companies and governments use bonds to raise money. For example, the Bahamian government periodically issues Bahama