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Stocks vs. Bonds
Investor success is typically predicated on understanding some of the basic assets that can be owned as part of a financial portfolio. No discussion of financial investment is complete without understanding the basic differences between a stock and a bond.
Stocks are traded on an equity exchange where individuals or organizations seek to purchase shares of organizations. Examples of equity exchange markets (i.e. stock market) in the United States are the NYSE and the NASDAQ. When purchasing a share of an organization, you essentially obtain a fraction of ownership interest in the organization which typically makes you eligible for voting rights within the company, as well as potential investment returns in the form of dividends and capital gains. Stocks can be purchased as individual shares or ETFs through the stock market. Stock ownership can also be obtained through investment into a mutual fund or an index fund, typically purchased through your investment firm.
Bonds are exchanged either over the counter or as part of a fund (ETF or index). In purchasing a bond, or a similar index or ETF fund, you are lending money to either a corporation or a government entity at a fixed or floating interest rate as determined at purchase. Practically speaking, by purchasing a bond you are lending money to one of these agencies similar to the way the bank lends money to a borrower. Essentially, you are the creditor in this relationship.
First, let us point out clearly where stocks and bonds are similar:
Now, where do they differ:
*According to Vanguard's Historical index risk/return (1926–2019)
**Note: Vanguard's Historical data for stock returns is primarily using one of the S&P indexes over time whereas fixed income (bonds) is highly varied between periods. See the bottom of their article for precise methodology.
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