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Bonds are debt, whereas
stocks are equity. This is the important distinction between the two
securities. By purchasing equity (stock) an investor becomes an owner in a
corporation. Ownership comes with voting rights and the right to share in
any future profits. By purchasing debt (bonds) an investor becomes a
creditor to the corporation (or government).
The primary advantage of
being a creditor is that you have a higher claim on assets than shareholders
do: that is, in the case of bankruptcy, a bondholder will get paid before a
shareholder. However, the bondholder does not share in the profits if a
company does well, he or she is entitled only to the principal plus
interest.
To sum up, there is generally less risk in owning bonds than in owning
stocks, but this comes at the cost of a lower return.
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