Bond Market vs. Stock Market: What's the Difference? (2024)

Bond Market vs. Stock Market: An Overview

It's time to invest your money. So how exactly are you going to allocate that money? After all, a well-diversified portfolio strategy is recommended before you start to buy assets such as stocks and bonds. Indeed, stocks and bonds are two of the most traded types of assets—each available for sale on several different platforms or through a variety of markets or brokers. And there are important, primary differences between stocks and bonds.

Key Takeaways

  • A stock market is a place where investors go to trade equity securities (e.g., shares) issued by corporations.
  • The bond market is where investors go to buy and sell debt securities issued by corporations or governments.
  • Stocks typically trade on various exchanges, while bonds are mainly sold over the counter rather than in a centralized location.
  • In the United States, the prominent stock exchanges include Nasdaq and the New York Stock Exchange (NYSE).

The Bond Market

The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds, which may be issued by corporations or governments. The bond market is also known as the debt or the credit market. Securities sold on the bond market are all various forms of debt. By buying a bond, credit, or debt security, you are lending money for a set period and charging interest—the same way a bank does to its debtors.

The bond market provides investors with a steady, albeit nominal, source of regular income. In some cases, such as Treasury bonds issued by the federal government, investors receive biannual interest payments. Many investors choose to hold bonds in their portfolios as a way to save for retirement, for their children's education, or other long-term needs.

Investors have a wide range of research and analysis tools to get more information on bonds. Investopedia is one source, breaking down the basics of the market and the different types of securities available. Other resources include Yahoo! Finance's Bond Center and Morningstar. They provide up-to-date data, news, analysis, and research. Investors can also get more specific details about bond offerings through their brokerage accounts.

A mortgage bond is a type of security backed by pooled mortgages, paying interest to the holder monthly, quarterly, or semi-annually.

Where Bonds Are Traded

The bond market does not have a centralized location to trade, meaning bonds mainly sell over the counter(OTC). As such, individual investors do not typically participate in the bond market. Those who do, include large institutional investors like pension funds foundations, and endowments, as well as investment banks, hedge funds, and asset management firms. Individual investors who wish to invest in bonds may do so through a bond fund managed by an asset manager. Many brokerages now also allow individual investors direct access to corporate bond issues, Treasuries, munis, and CDs.

New securities are put up for sale on the primary market, and any subsequent trading takes place on the secondary market, where investors buy and sell securities they already own. These fixed-income securities range from bonds to bills to notes. By providing these securities on the bond market, issuers can get the funding they need for projects or other expenses needed.

For investors without access directly to bond markets, you can still get access to bonds through bond-focused mutual funds and ETFs.

Who Participates in the Bond Market?

The three main groups involved in the bond market include:

  • Issuers: These are the entities that develop, register, and sell instruments on the bond market, whether they're corporations or different levels of government. For example, the U.S. Treasury issues Treasury bonds, which are long-term securities that provide bi-annual interest payments for investors and mature after 10 years. Investing in certain sectors ofthe bond market, such as U.S. Treasury securities,is said to beless risky than investing in stock markets, which areprone to greater volatility.
  • Underwriters: Underwriters usually evaluate risks in the financial world. In the bond market, an underwriter buys securities from the issuers and resells them for a profit.
  • Participants: These entities buy and sell bonds and other related securities. By buying bonds, the participant issues a loan for the length of the security and receives interest in return. Once it matures, the face value of the bond is paid back to the participant.

Bond Ratings

Bonds are normally given an investment grade by a bond rating agency like Standard & Poor's and Moody's. This rating—expressed through a letter grade—tells investors how much risk a bond has of defaulting. A bond with a "AAA" or "A" rating is high-quality, while an "A"- or "BBB"-rated bond is medium risk. Bonds with a BB rating or lower are considered to be high-risk.

The Stock Market

A stock market is a place where investors go to trade equity securities, such ascommon stocks, and derivatives—including options and futures. Stocks are traded on stock exchanges. Buying equity securities, or stocks, means you are buying a very small ownership stake in a company. While bondholders lend money with interest, equity holders purchase small stakes in companies on the belief that the company performs well and the value of the shares purchased will increase.

The primary function of the stock market is to bring buyers and sellers together into a fair, regulated, and controlled environment where they can execute their trades. This gives those involved the confidence that trading is done with transparency, and that pricing is fair and honest. This regulation not only helps investors but also the corporations whose securities are being traded. The economy thrives when the stock market maintains its robustness and overall health.

Just like the bond market, there are two components to the stock market. The primary market is reserved for first-run equities: initial public offerings (IPOs) will be issued on this market. This market is facilitated by underwriters, who set the initial price for securities. Equities are then opened up on the secondary market, which is where most trading activity takes place.

5

The number of securities that first started trading on the New York Stock Exchange on May 17, 1792—the first day of trading.

The Prominent U.S. Stock Exchanges

In the United States, the prominent stock exchanges include:

  • Nasdaq, a global, electronic exchange that lists the securities of smaller capitalization companies from different parts of the world. Although technology and financial stock make up the bulk of the index, it also includes consumer goods and services, healthcare, and utilities. This exchange also forms the basis of the U.S. technology sector benchmark index.
  • New York Stock Exchange (NYSE)is the largest exchange in the world based on the total market cap of its listed securities. Most of the oldest and largest publicly-traded companies are listed on the NYSE. The NYSE has gone through a series of mergers and was most recently purchased by the Intercontinental Exchange (ICE) in 2013. Thirty of the largest companies on the NYSE make up the Dow Jones Industrial Average (DJIA), which is one of the oldest and most-watched indexes in the world.
  • American Stock Exchange (AMEX), which wasacquired by the NYSEEuronextand became theNYSE Americanin 2017.It was first known for trading and introducing new products and asset classes. The exchange was also the first to introduce an ETF. Operating electronically, the exchange is home to mostly small-cap stocks.

These markets are regulated by the U.S. Securities and Exchange Commission (SEC).

Key Differences

One major difference between the bond and stock markets is that the stock market has central places or exchanges where stocks are bought and sold.

The other key difference between the stock and bond market is the risk involved in investing in each. When it comes to stocks, investors may be exposed to risks such as country or geopolitical risk (based on where a company does business or is based), currency risk, liquidity risk, or even interest rate risks, which can affect a company's debt, the cash it has on hand, and its bottom line.

Bonds, on the other hand, are more susceptible to risks such as inflation and interest rates. When interest rates rise, bond prices tend to fall. If interest rates are high and you need to sell your bond before it matures, you may end up getting less than the purchase price. If you buy a bond from a company that isn't financially sound, you're opening yourself up to credit risk. In a case like this, the bond issuer isn't able to make the interest payments, leaving itself open to default.

Stock market performance can broadly be gauged using indexes such as the S&P 500 or Dow Jones Industrial Average. Similarly, bond indices like the Barclays Capital Aggregate Bond Index can help investors track the performance of bond portfolios.

Bond Market vs. Stock Market: What's the Difference? (2024)

FAQs

Bond Market vs. Stock Market: What's the Difference? ›

A stock market is a place where investors go to trade equity securities (e.g., shares) issued by corporations. The bond market is where investors go to buy and sell debt securities issued by corporations or governments.

What is the difference between stock market and bond market? ›

The debt or bond market is where loan assets are bought and sold. There's no single physical exchange for bonds. Transactions are mainly made between brokers, large institutions, or individual investors. The equity or stock market is where stocks are bought and sold.

What is the difference between stocks and bonds for dummies? ›

The biggest difference between stocks and bonds is that with stocks, you own a small portion of a company, whereas with bonds, you loan a company or government money. Another difference is how they make money: stocks must grow in resale value, while bonds pay fixed interest over time.

Is it better to invest in stocks or bonds? ›

As you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.

What's the difference between stocks and bonds which is more risky to own and why? ›

In general, stocks are riskier than bonds, simply due to the fact that they offer no guaranteed returns to the investor, unlike bonds, which offer fairly reliable returns through coupon payments.

What is the major difference between shares and bonds? ›

Shares are issued by firms, priced daily and listed on a stock exchange. Bonds, meanwhile, are effectively loans where the investor is the creditor.

What describes the different markets for stocks and bonds? ›

Key Takeaways. A stock market is a place where investors go to trade equity securities (e.g., shares) issued by corporations. The bond market is where investors go to buy and sell debt securities issued by corporations or governments.

What is the main difference between a bond and a common stock? ›

A stock is an investment in a company. Your investment (purchased in shares) can grow or decline based on the company's success. A bond is an investment in a company's or government's debt. After you purchase a bond, the entity develops a plan to repay the principal of your investment with interest.

What is bond in simple words? ›

Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.

What is the average return on bonds? ›

The bond market is a wide field, with many different categories of assets. In general, you can expect a return of between 4% and 5% if you invest in this market, but it will range based on what you purchase and how long you hold those assets.

What are cons of bonds? ›

Cons of Buying Bonds
  • Values Drop When Interest Rates Rise. You can buy bonds when they're first issued or purchase existing bonds from bondholders on the secondary market. ...
  • Yields Might Not Keep Up With Inflation. ...
  • Some Bonds Can Be Called Early.
Oct 8, 2023

Why would someone buy a bond instead of a stock? ›

Unlike stocks, bonds come with fixed interest rates that promise a certain return. No matter how the value of the bond fluctuates, you are assured a specific percentage yield on your initial investment⎯albeit a slightly lower one than what you might expect from a stock investment.

Are bonds safer than stocks in a recession? ›

Bonds, particularly government bonds, are often seen as safer investments during a recession due to their regular interest payments and the fact that they are less volatile compared to other assets like stocks.

Can you lose money on bonds if held to maturity? ›

By contrast, if you buy individual bonds and hold them to maturity, you won't see those daily price moves. And you'll collect your interest payments and get the bond's face value when it comes due (assuming no credit problems), even if rates go up. So you never lose your principal.

What is the safest type of bond? ›

Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government.

Do bonds rise when stocks fall? ›

Key Takeaways. In theory, rising stock prices draw investors away from bonds, causing bond prices to drop, as sellers lower prices to appeal to market participants. Since bond prices and bond yields move inversely, eventually, the falling bond prices would push the bond yields high enough to attract investors.

Why do people buy bonds? ›

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.

Which is better money market or bonds? ›

Bond (and bond fund) yields are typically higher than money market funds. While the spread between bonds and money market funds is narrower today than it has been historically, investors are receiving more income from bonds. Bonds will appreciate if interest rates fall.

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