Stocks vs. Bonds for dummies.

Lets say you have hit the point in your finances when you would like to consider investing your money. You have heard of both stocks and bonds but don't really understand the differences between the two and the benefits of both. I am here to tell you in layman's terms what the difference between stocks and bonds is. 

When you purchase stock, you are buying into the company and are part owner of the company. When you purchase bonds you are not purchasing ownership you are just considered a creditor. Stocks have no maturity date while bonds have a predetermined maturity. Stocks however generate variable periodic income and bonds generate fixed periodic income. When you invest in stocks you do not know how many payments you'll receive over the time of ownership. When you invest in bonds you know how many payments you'll receive over the life of the bond. Bonds also have a set end value (par value) that you'll receive at maturity. Stocks do not have a set end value because they do not have a set maturity. Stock's rate of return remains unknown until you sell the stock (hint: buy low sell high). Bond's rate of return is known if it is held to the maturity, this is known as the Yield to Maturity or Yield to Call depending on the type of Bond. 

As you can probably now gather, stocks are a very unpredictable investment therefore posing a higher risk. Bonds are a very predictable investment therefor posing less risk. It seems like Bonds would be an obvious choice when investing money but that is not the case. The higher the risk of investment the higher the potential yield could be. If you are looking for a safe and secure investment, bonds are a great choice. If you are looking for a riskier and potentially higher yield investment, stocks are a good choice. The benefit of bonds vs stocks is that if the company goes bankrupt, you still get your initial investment and promised money where as if you owned stocks, you would be out the money. The benefit of stocks vs bonds is that you have the potential to earn more money over the course of your ownership.