A stock gives you a share of ownership in a company, so you earn if its value rises or it pays dividends. A bond is a loan you make to a government, municipality or company, which promises to pay you interest and return your principal when the bond matures. Investor.gov says stocks offer the greater growth potential, while bonds aim for predictable income.
Stocks and bonds sit side by side in almost every pension and investment account, but they work in opposite ways. One makes you a part-owner; the other makes you a lender. The US Securities and Exchange Commission's investor education site, Investor.gov, explains both in plain terms, and its pages are the basis for everything below.
Stocks and bonds side by side
| Stocks | Bonds | |
|---|---|---|
| What you hold | A share of ownership in a company, also called equities | A debt security, like an IOU: you're lending to the issuer |
| Who issues them | Companies | Governments, municipalities and corporations |
| How you make money | Capital appreciation, plus dividends if the company pays them | Interest at a specified rate, and your principal back at maturity |
| Main kinds | Common and preferred | Corporate, municipal and U.S. Treasuries |
| If the company goes bankrupt | Common stockholders are last in line | Bondholders are paid first |
| Main risks | Values move down as well as up, and you can lose money | Credit, interest rate, inflation, liquidity and call risk |
Owning a slice versus lending money
Investor.gov says people buy stocks for capital appreciation (when a stock rises in value), for dividend payments when a company shares some of its earnings, and for the ability to vote and influence the company. Companies issue stock to raise money for things like paying off debt, launching products, entering new markets or building facilities.
With a bond, you're the lender. The issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also called face value or par value, when it matures after a set period. Investor.gov says people buy bonds for a predictable income stream, since bonds typically pay interest on a regular schedule such as every six months, and because holding to maturity returns the whole principal. Bonds can also help offset more volatile stock holdings.
Who gets paid first when a company fails
This is the difference most beginners never think about until it matters. If a company goes bankrupt and its assets are liquidated, Investor.gov says the bondholders are paid first, then holders of preferred stock, and common stockholders get whatever is left, which may be nothing. It's also why preferred stock exists: preferred holders usually don't have voting rights, but they get dividends before common stockholders and rank ahead of them in a liquidation.
The kinds of stock you'll come across
Common stock lets you vote at shareholder meetings and receive dividends. Beyond that, Investor.gov sorts stocks into styles. Growth stocks have earnings growing faster than the market average and rarely pay dividends. Income stocks pay dividends consistently, like an established utility. Value stocks have a low PE ratio, and people buy them hoping the market has overreacted. Blue-chip stocks are shares in large, well-known companies with a solid history of growth. Stocks are also grouped by company size into large-cap, mid-cap and small-cap, and Investor.gov calls penny stocks highly speculative: they don't pay dividends and the companies may have little or no earnings.
The three main families of bonds
- Corporate bonds, issued by private and public companies. Investment-grade bonds have a higher credit rating and less credit risk; high-yield bonds have a lower rating, more risk and higher interest rates in return.
- Municipal bonds, or 'munis', issued by states, cities, counties and other government bodies. Investor.gov says the interest is generally exempt from federal income tax and may be exempt from state and local taxes for residents of the issuing state.
- U.S. Treasuries, issued by the U.S. Department of the Treasury and backed by the full faith and credit of the U.S. government. Bills mature in a few days up to 52 weeks, notes within ten years, and bonds typically in 30 years. TIPS adjust their principal in line with inflation, measured by the CPI, and are issued with maturities of five, ten and 30 years.
Where each one can hurt you
Stock values move down as well as up, and there's no guarantee the company will do well. Investor.gov points out that large company stocks as a group have lost money on average about one out of every three years, and a share's value can be knocked by problems inside the company, like a faulty product, or by political and market events outside it. Spreading money across a number of different stocks, and holding other assets such as bonds, offsets some of that risk.
Bonds have their own set of risks. Credit risk is the issuer failing to pay interest or principal on time. Interest rate risk means that if rates rise, older bonds paying less become less appealing, so you might sell below face value before maturity. Inflation eats into a fixed rate of interest. Liquidity risk is not finding a buyer when you want to sell, and call risk is the issuer retiring a bond early, which it might do if interest rates fall.
Buying them, and the fees involved
You can buy stocks through a direct stock plan run by the company, a dividend reinvestment plan, a broker, or a stock fund. Investor.gov says that, as of Nov 2026, these plans may charge fees, brokers charge a commission, and a full-service broker's higher commissions pay for investment advice, while a lower-commission broker generally leaves the research and choices to you. Public companies register with the SEC and file reports you can search on its EDGAR system, and publicly offered corporate bonds must be registered too. Investor.gov says to be wary of anyone selling non-registered bonds.
If you're starting out, my guide to making money in the stock market as a beginner goes further, and here's what works with dividend stocks for passive income.
My advice on stocks or bonds
It depends on when you'll need the money and how much a fall in value would hurt you. Investor.gov's own guidance is that if you're young and saving for a long-term goal such as retirement, you may want to hold more stocks than bonds, while people nearing or in retirement may want more bonds than stocks. It also notes that investors who stuck with stocks over long periods, say 15 years, have generally been rewarded. Most people end up holding both, and the mix is the decision worth taking time over, ideally with a qualified adviser.
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Frequently asked questions
What is the main difference between stocks and bonds?
A stock makes you a part-owner of a company. A bond makes you a lender to a government, municipality or company, which pays you interest and returns your principal at maturity.
Are bonds safer than stocks?
They carry different risks. Investor.gov says bonds can preserve capital and give predictable income, but they still face credit, interest rate, inflation, liquidity and call risk. Stocks offer more growth potential and can lose money.
Who gets paid first if a company goes bankrupt?
Bondholders are paid first, then preferred stockholders. Common stockholders get whatever is left, which may be nothing.
How often do bonds pay interest?
Investor.gov says bonds typically pay interest on a regular schedule, such as every six months. U.S. Treasury bonds and TIPS pay interest every six months.
Should I hold more stocks or more bonds?
Investor.gov says younger people saving for a long-term goal may want more stocks than bonds, while people nearing or in retirement may want more bonds than stocks.
Is municipal bond interest taxed?
Investor.gov says interest from municipal bonds is generally exempt from federal income tax and may also be exempt from state and local taxes for residents of the issuing state.
