Stocks vs. Bonds: Understanding Key Similarities

What are the Similarities Between Stocks and Bonds?

Stocks and bonds are both major forms of investments, although they represent fundamentally different forms of securities, they share a large number of similarities: why they are issued, how and where they are bought and sold, who overseas their trade, etc. Some of these are important and some merely superficial, but they underscore what these two very old financial instruments have in common.

Identification

A bond is a loan under a different guise. A bond is a security issued to by an authorized entity, promising to repay borrowed money under set terms (the most important being interest and duration) on a given date. That date is referred to as the bond's maturity.

Stock refers to a share of ownership in a company or corporation. The terms "stock," "share," and "equity share" are all basically synonymous. The size of the share in a company that an individual stock represents depends on the number of shares issued. Owning 100 shares out of 1,000 available means 10 percent ownership of the whole company, while owning 100 shares out of 20,000 is 0.5 percent ownership of the company.

Function

The main similarity between a stock and a bond is that both are classified as securities. In addition, some forms of bonds are even more similar to stocks in that they are tradeable securities. This leads to another form of similarity: there is a bond market and a stock market, and combined these both form the Capital Market.

Significance

Capital markets have the primary market and the secondary market. The primary market is where new stock and bonds issues are sold. Corporations make new stock issues to raise capital and governments issue bonds for the same reason: to raise money. This is yet another similarity between stocks and bonds. The secondary market, however, is where existing stocks and bonds are sold and is what most people think of when they imagine the stock or bond market.

Considerations

Both the bond and stock market are regulated by the US Securities and Exchange Commission, which is another characteristic that they share.

Warning

As similar as stocks and bonds are, they are also very different, and in two ways. First, a bond-holder is a lender to a company or government, where a stockholder is a part-owner. Second, stocks are indefinite, whereas bonds are held for a set length of time (known as their maturity date).