Bond market vs stock market is a crucial differentiating factor as both markets can earn you money but they are different in terms of the potential risks and rewards. Let us try and understand the difference between the bond market and the stock market.
When you buy a share of stock, you actually end up taking the ownership in the company whose stock you are investing in. This means that you will end up sharing the profits as well as the losses incurred by the company in the years to come. If a company’s revenue decreases, it would ultimately affect the stock price of that company leading to a decline in the stock price. However, if the company’s revenue increases, the stock price would go up because the company is generating more profits.
On the other hand, a bond does not allow you ownership in a company. If a company wants to raise money without dividing itself, they can decide to sell bonds instead of issuing stocks. So, when you buy a bond of a company, you become more like a creditor than an owner in the company, and you are paid back over the life of the bond. As a bondholder, you will earn a return on your money, which is a fixed percentage, and this return is paid annually. So, if a bond is for 10 years, you will get interest for each of those 10 years and then your principal amount (the amount you invested) is returned to you at the time of expiration of the bond.
In the short term, you have greater chances of losing money in the stock market than the bond market. However, in order to figure out which is a better investment opportunity, you should study your risk tolerance along with the kind of returns you are looking for and according make the choice of investing either in the bond market or the stock market.
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