According to Brigham & Houston (2021), an ownership stake in a company is represented by common stock, each of which entitles the owner to dividends and the ability to vote on the company’s directors and policies. On the other hand, a bond is a long-term agreement between the borrower and the bondholders that requires the borrower to pay interest and principal on predetermined dates (Brigham & Houston, 2021).
One of the main differences is that bond cash flows can typically be predicted with relative ease, but common stock cash flows are much harder to predict. Bonds and stocks, respectively, are commonly meant when equity and debt markets are discussed (Tekin, 2020). Companies frequently sell stock to generate funds for operational expansion, and in exchange, investors have the chance to profit from the company’s future success and development. When bonds are purchased, a debt is created that must be redeemed with interest. Although owning a bond does not imply any ownership in the firm, one will sign a contract requiring it or the government to pay a predetermined interest rate over time in addition to the principal amount when it is due.
There is a tendency for common stocks and bonds to have inverse price relationships, wherein when stock prices rise, bond prices decrease, and vice versa, which is another significant distinction between the two (Black & Scholes, 2019). Since the return is based purely on the functioning of the company, common stocks are riskier. In contrast, bondholders get priority in repayment. Both stocks and bonds are recognized as financial tools that commercial and institutional customers use to store their money in anticipation of receiving greater returns. The similarity between the two is that stocks and bonds can be sold on the market for a profit, namely a capital gain (Landoni, 2018).
Black, F., & Scholes, M. (2019). The Pricing of Options and Corporate Liabilities. World Scientific Reference on Contingent Claims Analysis in Corporate Finance, 3–21. Web.
Brigham, E.F., & Houston, J.F. (2021). Fundamentals of financial management: Concise edition (11th ed.). Cengage Learning.
Landoni, M. (2018). Tax distortions and bond issue pricing. Journal of Financial Economics, 129(2), 382–393. Web.
Tekin, H. (2020). Market differences and adjustment speed of debt, equity, and debt maturity. Australian Journal of Management, 46(4), 629–651. Web.