What is the difference between a stock and a bond?

Investors often put their money in both stocks and bonds with the objective to diversify their investment portfolio. Regardless, the extent up to which one should expose their portfolio to these investment options depends on multiple factors like risk appetite, time horizon and financial goals. Individuals, thus, need to be aware of bonds vs stocks and their underlying differences to ascertain the ideal investment ratio.

What are Bonds and Stocks
In a general sense, bonds are debt instruments. In other words, they are loans made out to an organisation. Being a debt, they appear as liabilities in a company’s balance sheet.

Bonds come in handy to raise funds, and they provide fixed returns in the form of interest. One must note that any organisation can issue a bond, including – governments, non-profit organisations, corporations, etc.

The bond market is known as the – credit market or simply the bond market. Generally, bonds are traded on stock exchanges. However, in terms of transactional volume, they are much lower than stocks.

Characteristics of Bonds
Some prominent features of bonds include –

Repaying the principal – the principal is returned to the lender on a pre-fixed date. The time mentioned in the bond is known as the date of repayment or maturity date.
Call option – It enables the issuing company to repurchase their bonds at a price that is above par value.
Pledge of security – It serves as a promise in writing that is duly signed and sealed. After this, it is forwarded to the trustee by the concerned company.
Interest payouts – The interest rate is popularly known as coupon rate. The interest amount is paid at regular intervals by the concerned authority that issued the bond.
Covenants – Covenants serve as an agreement between a company and its bondholders through trustees.