There are more than a dozen different kinds of bonds listed on the New York Stock Exchange (NYSE), from convertible and foreign sovereign bonds to non-U.S. currency denominated and U.S. Treasury bonds. So in one sense, it really depends what types of specific stocks and bonds are being compared when asking what the differences are between stocks and bonds.
But generally speaking, whereas a share of stock in a company represents a direct stake of ownership in that firm, a bond is a way for that same company to raise money for its operations and activities, in exchange for a promised annual return. In the case of a bond, the purchaser is essentially lending a company money, and being paid back the original amount of money plus a certain percentage of interest, for that privilege.
Bonds a Different Risk Proposition
The structure of bonds means they represent a far less risky investment than the stock market. The rewards for a company stockholder can be far greater, but they can also be far less. Therefore, those who invest in stocks vs. those who invest in bonds are essentially buying into two very different kinds of risk propositions.
Bond Investment Terms
In the fall of 2010, the NYSE listed more than 29,000 bond offerings from upwards of 4,000 different companies. These bonds can also be traded in Europe via an arrangement with the Luxembourg Stock Exchange. As with the stock market, a whole glossary of bond investment terms needs to be learned. Among the several dozen terms are: zero-interest bonds, which instead of offering interest are priced at a discount upfront; non-callable bonds, which cannot be redeemed before the end date; and agency bonds, which though usually issued by government agencies such as the Federal Home Loan Bank Board, are not backed by full faith and credit of the U.S. government.
New York Stock Exchange – Bond Issue Types, Retrieved November 14, 2010 from http://www.nyse.com/bonds/nysebonds/Bonds_IssueType.html
RussellBailyn.com – The Difference Between Stocks and Bonds, Retrieved November 14, 2010 from http://www.russellbailyn.com/weblog/2005/11/stocks_bonds.html
New York Stock Exchange – Bonds Overview, Retrieved November 14, 2010 from http://www.nyse.com/bonds/1207087035646.html