So Many Shoes, So Little Money – Blog

Stocks versus Bonds

August 28th, 2009

Let’s review the differences between owning debt (a bond) and owning equity (a stock). When you own debt (you buy a bond), you are guaranteed the return of your money (the principal) plus the interest payments associated with that bond. When you own equity (you buy a share of stock) you are not guaranteed either the return of your money or any interest payments (dividends). Remember: the lower the risk, the lower the return; the higher the risk, the higher the return. That’s why you can make more money from owning stock if the company is successful than you can from owning a bond. Stocks are riskier. However, it is also because of this risk that you can lose money—a lot more money—from owning stocks than you can from owning bonds. In fact, if a company in which you have purchased stock goes bankrupt, shareholders do not get any of their money back until bond holders are paid back. Stockholders are paid back last. By then, there is usually very little, if anything left over to pay back the shareholders. In other words, stockholders are out of luck. Their money is history.

Filed under: Investing

Tags: stock