The investors are suggested to diversify their portfolio into both equity funds (shares) and debt funds (bonds) to bypass the risks of loss as well as to magnify or stabilize the tentative returns. Therefore, one should clearly understand the difference between shares and bonds.
A right decision on the right investment opportunity could get you one step ahead in future. A right profitable investment act as an additional source of income in this environment to beat inflation.
There are two kinds of people in the society, one has a mindset to earn money by taking any amount of risk whereas the second one is those people who have a mindset to get fewer returns provided their investment must be secured.
The basic difference between shares and bonds is that shares are the funds raised by the corporations or business entities by splitting their ownership to the general public, on the other hand, bonds are kind of debt securities classified as debt issued by the companies or government entities.
See Also, Difference between Debt and Equity Funds
Table of Contents
Share vs Bond:
The following comparison table will quickly explain the key difference between shares and bonds.
| BASIS OF COMPARISON | SHARES | BONDS |
|---|---|---|
| Belongs To | Equity Instruments | Debt Instruments |
| Mode of Returns | Dividend | Interest |
| Issuer | Public Limited Companies | State and Sovereign Government, Municipalities & Public Sector Units |
| Redeemibility | NO | YES |
| Security | NO | YES |
| Voting Rights | YES | NO |
| Liquidity | HIGH | LOW |
| Rate of Returns | Uncertain | Fixed |
| Additional Income | YES | NO |
Difference between Shares and Bonds:
The shares and bonds can be distinguished on the basis of two perspectives one is investors and other is issuing organisation.
For issuing entities, shares (equity shares) are stakes of the investors in the company, on the other hand, bondholders are the creditors of the company or government entities.
For investors point of view, we can distinguish shares from bonds on the following basis.
1) Belongs To:
Shares/ Stocks are the equity instruments whereas bonds are the debt instruments.
2) Mode of Returns:
The returns on shares are avail in the form of dividend whereas in case of bonds returns are in the form of interest.
3) Issuer:
Shares are typically issued by public limited companies whereas bonds are mostly issued by municipalities state and sovereign government as well as public sector units to fulfil their long term requirement for financing numerous projects and activities.
4) Rate of Returns:
Bonds offer a fixed rate of interest, on the other hand, shares don’t provide a certain return (dividend) as it depends on the profits as well as management’s decision of the issuing company.
5) Redeemibility:
Bonds are the source of long term finance and can be redeemed on a future specific date, whereas shares can never be redeemed however it can be sold to other investors any time in the stock exchange at the current share price. Therefore, equity shares are known as highly liquid instruments.
6) Security:
Bonds are always backed up by collateral, hence always secured in nature whereas shares are unsecured.
7) Voting Rights:
Shareholders possess the voting rights in the company whereas bondholders don’t have such voting rights.
8) Liquidity:
Shares of any public limited company can be purchased through only stock exchanges (NSE, BSE) and bonds, on the other hand, can be purchased from Government institutions, financial institutions and public undertakings.
9) Additional Income:
Shareholders have an opportunity to earn a capital gain due to appreciation in share price but bondholders are entitled to guaranteed returns (fixed interest income) only.
Conclusion:
Thus we can conclude from the above comparison that bonds not only offer guaranteed returns but also carry minimal risks as secured by Government itself.
However, shares neither provide guaranteed returns nor secured in nature but have the opportunity to earn capital gains in the long run.
Therefore, those who can bear the inherent risks in equity shares can invest in shares but those who don’t wish to bear risk can go with bonds.
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