A stock represents a share of ownership in a joint-stock company, while a bond is a debt security. By purchasing a bond, you lend money to the issuer (the state, a local government, a bank, or a company), who agrees to repay it with interest. Thus, a shareholder is a co-owner and receives income from price appreciation and dividends, while a bondholder is a creditor and receives interest income. This difference leads to different levels of risk: shares may generate higher returns, but their value fluctuates significantly more.
To sum it up
- Promotion = joint ownership of a company; bond = a loan granted to the issuer.
- Shares entitle you to receiving dividends (if the company pays them) and, as a rule, the right to vote at the general meeting; bonds give the right to receiving interest and return of the nominal value.
- Stock have no maturity date ; bonds have a specific date by which the issuer returns the money.
- Stocks are generally more risky ; bonds are more stable, but they are not without risk.
What are shares?
Promotion — is a security representing a portion of the share capital of a joint-stock company. Anyone who acquires shares becomes co-owner of the company — to the same extent that its shares constitute part of the total capital.
A shareholder can make money in two ways:
- Price increase – selling shares at a price higher than the price at which they were purchased;
- Dividends – a portion of the company's profits that can be distributed among shareholders. The decision is made at the general meeting; the company is not obligated to pay dividends annually.
Shares also provide corporate rights, primarily right to vote at the general meeting (Although there are preferred shares and non-voting shares.) Shares of public companies are purchased on the stock exchange—in Poland, the Warsaw Stock Exchange—through a brokerage account.
What are bonds?
Bond — is a security in which the issuer declares its indebtedness to the bondholder and undertakes to provide a specific benefit—usually the payment of interest and a return nominal value at upon maturity . Bonds are issued by, among others, the state treasury (treasury bonds), local authorities (municipal), banks and companies (corporate).
The interest rate on bonds may be as follows:
- Constant – known in advance throughout the entire period;
- variable – linked, for example, to the NBP or WIBOR base rate;
- indexed to inflation – as, for example, in some retail Treasury bonds (e.g., four-year COI or ten-year EDO).
Retail treasury bonds are purchased directly from the government (e.g., through the website bondacjeskarbowe.pl) at 100 zlotys per bond. Other bonds, including corporate bonds, are listed on the Catalyst market, among others.
Stocks and bonds - the most important differences.
| Characteristic | Stock | Bonds |
|---|---|---|
| Character | Ownership share (equity instrument) | accounts receivable (debt instrument) |
| Investor - | co-owner of the company | issuer's creditor |
| Issuer | joint-stock company | state, local government, bank, company |
| Source of income | stock price growth, dividends | interest (coupon), possible price change on the market |
| Deadline | indefinitely | specific maturity date |
| right to vote | usually like this | NO |
| Risk and volatility | higher | usually lower (depending on the issuer) |
| In case of bankruptcy of the issuer | shareholders at the end of the line | creditors satisfied before shareholders |
Risk and Reward: Stocks or Bonds?
Stock prices depend on company performance, industry conditions, and market sentiment, so they can rise or fall sharply in a short period of time. Investors could even lose their entire investment if the company goes bankrupt. In return, stocks offer the potential for higher long-term returns, although this can never be guaranteed.
Bonds are generally more stable because the interest rate and maturity date are known in advance. However, they are not without risks:
- Default risk – the issuer may not return the money; this is especially true for bonds of companies in poor financial condition;
- Interest rate risk – when rates rise, the market price of fixed-rate bonds usually falls, which is important when selling before maturity;
- Inflation risk – with a fixed interest rate, high inflation can «eat up» real profits.
In Poland, profits from both types of investments (interest, dividends, and profits from asset sales) are generally subject to capital gains tax at the rate of 19%, also known as the Belka tax. Exceptions apply, in particular, to investments through IKE and IKZE accounts, according to the conditions specified by law.
Stocks or bonds – what to invest in?
The choice depends on your goal, your prospects, and how much you're willing to tolerate fluctuations. General tips:
- Short-term perspective (you'll need the money in a year or two) – Treasury bonds or deposits are safer; stocks may suffer losses during this period.
- Long-term horizon (several years or more) - stocks, preferably widely diversified, such as through index funds, offer the opportunity to achieve higher returns at the expense of greater fluctuations.
- Combination of both classes – Many investors divide their portfolio between stocks and bonds to balance risk.
- Don't invest in something you don't understand. — Before purchasing corporate bonds, check the issuer's financial position and review the issue documentation.
This article is for educational purposes only and does not constitute investment advice. Before making any decisions, please consult a licensed investment advisor.
Frequently Asked Questions (FAQ)
Which is safer: stocks or bonds?
Typically, bonds, especially government bonds, are issued because the issuer undertakes to pay interest and repay the principal within a specified period. Stocks are subject to greater price fluctuations. However, bonds from weak companies can be riskier than bonds from large, stable companies.
Do bonds always have a fixed interest rate?
No. The interest rate on bonds can be fixed, variable (for example, linked to the National Bank of Poland rate or WIBOR), or indexed to inflation, as is the case with some retail treasury bonds.
Does a shareholder have influence over the company?
Yes, as a rule, they have voting rights at general meetings proportional to the number of shares they own (with the exception of non-voting shares). Bondholders do not have this right.
What happens to stocks and bonds when a company declares bankruptcy?
During bankruptcy proceedings, creditors, including bondholders, are granted their claims before shareholders. Shareholders receive their compensation only after all debts are repaid, which is extremely rare.
Are profits from stocks and bonds taxable?
In principle, yes – the capital gains tax is 19% (Belka tax). Exceptions are provided, in particular, by the provisions concerning the IKE and IKZE. For tax questions, it's worth consulting a tax advisor.
See also
- What is the difference between fixed and variable loan interest rates?
- What is the difference between renting and leasing?
- What is the difference between WIBOR 3M and WIBOR 6M?
- What is the difference between finance and operating lease?