Stocks (equities) give investors ownership, voting rights (often), and potential dividends, while bonds represent creditor claims that pay interest and return principal at maturity. Preferred shares bridge equity and debt features. Bonds generally rank ahead of shareholders in payouts during financial distress and come in many types (tax status, credit quality, maturity, secured/unsecured). Stocks commonly trade on exchanges; many bonds trade OTC. Together, they provide complementary roles in investor portfolios.
Stocks vs. Bonds: the essential difference
Stocks (equities) and bonds (debt instruments) are two fundamental ways institutions raise capital. A stock represents an ownership stake in a company. Holders of stock share in a firm's profits and losses and, for many shares, have voting rights on corporate matters.
A bond is a loan from an investor to an issuer. Governments, municipalities, corporations, and some agencies issue bonds to borrow money. A bond contract specifies the repayment of principal at a set maturity date and the interest payments (coupon) the issuer will make during the life of the bond.
What stock ownership means
Common stock (ordinary shares) typically gives owners the right to vote on directors and major corporate actions and to receive dividends when declared. Dividends are not guaranteed; companies decide whether and how much to pay.
Preferred stock sits between debt and common equity. Preferred shareholders usually get priority over common shareholders for dividend payments and claims on assets in liquidation. Some preferred shares carry cumulative dividend rights (missed dividends accrue) or participating features (share in extra dividends under certain conditions).
Shareholders generally benefit from limited liability: their personal assets are not at risk for corporate debts beyond unpaid amounts on their shares. This protection can vary with company type and local laws; closely held or small private companies can present different legal risks.
How bonds work
When you buy a bond you become a creditor, not an owner. The issuer promises to return your principal at maturity and to make interest payments according to the bond's terms. Some bonds, such as zero-coupon bonds, do not make periodic interest payments; they sell at a discount and pay full value at maturity.
In financial distress or bankruptcy, bondholders rank ahead of shareholders in claims on the issuer's assets. Bonds come in many varieties: taxable vs. tax-exempt (e.g., many municipal bonds), secured vs. unsecured, short- vs. long-term, and investment-grade vs. high-yield based on credit quality.
Credit rating agencies (for example, S&P, Moody's, Fitch) assess issuer creditworthiness, which affects interest rates and investor demand.
Trading and market role
Stocks are commonly listed and traded on exchanges. Many bonds trade over-the-counter (OTC) or on electronic bond platforms rather than centralized exchanges. Both asset classes influence capital allocation, interest rates, and investor portfolios.
Putting them together in a portfolio
Equities typically offer growth potential and ownership benefits, while bonds generally provide predictable income and higher priority in creditor claims. Investors often combine stocks and bonds to balance risk and return, depending on goals and time horizon.
This article explains the core legal and economic distinction between equity and debt as of 2025 and how each instrument functions in modern markets.