The difference between stocks and bonds implies that stocks are shares owned by a business, while bonds are a form of debt that has to be repaid by the issuing authority at some point in the future. It is crucial to maintain a balance between two types of funding to provide a convenient capital structure for a business.
Explanation:
The following aspects, such as the priority of repayment, periodic payments, and voting rights, can define the major differences between stocks and bonds in business. The first aspect assumes that stocks are a riskier investment than bonds. In case of the liquidation of a business, the stockholders have the last claim on any residual cash.
In contrast, the bondholders have a significantly higher priority that depends on the terms of the bonds. With regard to the periodic payments, a company is allowed to reward its shareholders with dividends, while it is usually obliged to make regular interest payments to its bondholders for particular amounts.
Some bond agreements enable their issuers to delay or cancel interest payments, although it is not a common facet. A delayed payment or cancellation option declines the amount that investors are willing to pay for a bond. Ultimately, the stockholders can vote on specific company issues, for instance, the election of directors. However, bondholders have no voting rights.
Furthermore, the stock and bond concept involves some common features. As such, some bonds have conversion characteristics that allow bondholders to convert the bonds into company stock at specific predefined ratios of stocks to bonds. This option facilitates the bondholders to achieve an immediate increase in the capital when the price of a company’s stock rises.
Converting to stock also enables a former bondholder the right to vote on certain company issues. Both types of funding can be traded on a public exchange. This is common for the larger public companies, but rare for smaller entities that refrain from the inordinate expense of going public.
