Finance
Stocks vs. Bonds
A bond makes you a lender to a company, owed a fixed schedule of payments; a stock makes you an owner, with no promised payment at all but a direct share in everything the company earns.
Definition
A bond is a loan — buying one makes you a lender to whoever issued it (a company or a government), entitled to a fixed schedule of interest payments and the return of your principal at maturity, exactly as described in Bond Valuation. The issuer owes you that schedule regardless of how well or poorly the business actually performs.
A stock is equity — buying one makes you a part-owner of the company, per Capital Structure. There's no promised payment schedule at all: what a stock is worth, and whether it pays you anything, depends entirely on how the business actually performs and what other investors are willing to pay for a share of it.
Why this exists
Every company financing itself has to offer outside investors one of two fundamentally different deals, per Capital Structure: a fixed claim (lend money, get a promised return, get repaid before anyone else if things go wrong) or a residual claim (own a slice of the company, get paid only what's left over after every fixed obligation is met, but keep all the further upside if the company does exceptionally well). Bonds are the fixed claim; stocks are the residual claim. Both exist because different investors want different things — some want predictable income and are willing to give up the unlimited upside for it, others want to share fully in a company's growth and are willing to accept much less certainty in exchange.
This is a direct application of Risk & Return: because a stockholder is paid only after every lender and every other fixed obligation is satisfied, stocks are structurally riskier than that same company's bonds — and per Risk & Return, they have to offer a higher expected return on average to attract anyone willing to accept that added risk. Historically, diversified stock portfolios have outperformed bonds over long time horizons precisely because of this extra risk, not despite it.
Worked example
A company raises money by issuing both a bond and stock. A bond holder who lent $1,000 at 5% interest is owed exactly $50 a year, plus their $1,000 back at maturity — whether the company has an excellent year or a mediocre one. A shareholder who put in $1,000 is owed nothing specific at all: in a great year, the stock might be worth $1,400; in a bad year, it might be worth $700, or the company could even go under and the shareholder could be paid nothing, after lenders are repaid first.
Same company, same $1,000 investment — the bond holder traded away the big upside for a predictable, contractually promised return; the shareholder traded away that certainty for unlimited upside and a share of whatever's genuinely left over.
Common misconceptions
“Stocks are just riskier bonds.”
They're structurally different claims, not points on the same scale. A bond is a contractual promise to pay a fixed amount; a stock is ownership with no promised payment of any kind — the 'extra risk' in a stock comes from having no fixed claim at all, not from a bond-like promise that's simply less reliable.
“A company's stock and its bonds always move together.”
They can diverge significantly. A company under financial stress might see its stock collapse while its bonds hold up reasonably well, because bondholders are legally first in line to be repaid — the two securities carry genuinely different risk.
“Bonds are risk-free.”
Bonds are lower-risk than that same issuer's stock, not risk-free. A bond issuer can still default, and per Real vs. Nominal Returns, even a government bond carries inflation risk to its real purchasing power.