What's the Difference Between Stocks and Bonds?

There are two primary asset classes: stocks andbefore the rights of common shareholders;
bonds. Sure, international stocks, real estate, andhowever, bonds generally do not allow you to
commodities also have a part in most peoples'participate in the decision making of the company.
portfolios, but you really only need the twoThey also usually do not increase in value if the
mentioned above to achieve a minimum level ofcompany grows its profits. They are far less
diversification. Thus, the stocks vs bonds questionrisky than stocks, however.
is an important one for investors. It is alsoBoth stocks and bonds are issued by a company
important to understand why you need both.to raise capital. Stocks represent an actual equity
Proper risk management demands you own atinvestment in the company; an actual ownership
least some of both asset classes: stocks andstake in that company. When you own stock in a
bonds. However, the amount of each you own willcompany you own the right to vote for board
depend largely on your risk tolerance and timemembers, on important policy decisions, and most
horizon. Young investors will want to own moreimportantly, the right to a share of any residual
stocks and older investors more bonds.profits that may exist after the bills have been
So, what's the difference?paid. If the company in question manages to
Bonds, no the other hand, are basically a loan,increase its profits, the value of the stock will rise
exactly the same as if you borrowed money tosteadily over time along with earnings. And if the
buy a home or a car. When you buy bonds youcompany sees fit to pay a dividend, stock
have a legal right to receive a stated rate ofownership makes you eligible to receive a cut of
interest in return. This contractual right comesthe profits.