What is the difference between stocks and bonds?

The distinction between stocks and bonds is fundamental in the investment world, with each representing a different type of financial asset. Stocks are indeed shares of ownership in a company, meaning that when you purchase stock, you acquire a claim on a portion of the company's assets and earnings. Shareholders can benefit from capital appreciation and dividends, depending on the company's performance and policies.

On the other hand, bonds are essentially loans made by the investor to the issuer, which can be a company or government. When an investor buys a bond, they are lending money to the issuer in exchange for periodic interest payments, as well as the return of the bond's face value when it matures. This defines bonds as fixed-income securities because they provide a return based on fixed interest rates.

This differentiation helps investors understand the nature of their investments: stocks carry potential for higher returns along with higher risks due to market volatility, while bonds typically provide a more stable yet usually lower return, as they involve a promise to repay the loaned amount with interest.