Bonds vs. Stocks

Comparing bonds vs. stocks is a frequent consideration in investing, since both play different roles in building wealth. Stocks give investors ownership in a company and the chance to benefit from its growth through rising share prices and dividends. Bonds, on the other hand, are debt securities that provide regular interest payments and typically carry lower risk but more modest returns. The choice between bonds and stocks often comes down to an investor’s time horizon, risk tolerance and income needs.

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What Are Stocks?

A stock represents a share of ownership in a company. When you buy stock, you gain a proportional claim on the company’s assets and earnings. For example, purchasing Tesla stock means you own a small stake in the business, alongside other retail and institutional shareholders. Companies issue stock to raise capital, often through an initial public offering (IPO), which marks their transition from private to publicly traded.

Investors buy and sell stocks through exchanges like the New York Stock Exchange (NYSE) and Nasdaq. Prices fluctuate based on supply and demand, influenced by company performance, investor sentiment, and broader economic conditions. Investors aim to profit by buying shares at lower prices and selling them at higher ones, though returns may also come through dividends if the company distributes profits to shareholders.

What Are Bonds?

A bond is a debt instrument that represents a loan made by an investor to the issuer. In exchange, the issuer agrees to repay the principal at maturity and make periodic interest payments, known as coupons. Key details, like the price, maturity date and coupon rate, are disclosed at the time of purchase, with the coupon typically expressed as a percentage of the bond’s face value.

Bonds come in several forms. Treasury bonds are backed by the U.S. government and considered among the safest investments. Municipal bonds are issued by state or local governments, often carrying tax advantages. Corporate bonds are issued by companies and generally provide higher yields to compensate for added risk.

Some bonds are tied to specific assets. Mortgage-backed securities, for example, are backed by pools of real estate loans. These securities played a major role in the 2008 financial crisis, underscoring how bond structures can affect broader markets.

Bonds vs. Stocks: Which Should You Buy?

The choice of whether to invest in stocks or bonds is a personal one, and there is no simple answer. However, there are some basic guidelines that can help you decide which option is best for you.

Generally speaking, stocks are riskier than bonds. The prices of stocks can vary widely, and you never know what could cause a major fluctuation in the market. For example, you may invest in a company that is on the road to big success only to find out there is a major flaw in its business plan and see the stock price tumble. Or, there could be some geopolitical event that causes the whole stock market to fall drastically.

On the other hand, a well-timed stock purchase held for a long period of time can lead to a substantial return on your initial investment.

Bonds, meanwhile, tend to be safer. If a bond has a high rating, it is very likely to give you the promised return. That return is not going to be as big as a riskier investment like a stock.

If you’re a younger investor farther from retirement, you may be more willing to take on risk by holding more stocks. Older investors, by contrast, often shift toward bonds as they look to preserve wealth and generate steady income. For many, a balanced portfolio that blends both asset types works best, gradually moving toward a higher bond allocation with age.

Deciding on a Stock-Bond Mix

Determining how much of a portfolio to allocate to stocks versus bonds depends largely on an investor’s age, goals and tolerance for risk. Stocks offer higher growth potential but greater volatility, while bonds provide steadier income and stability. A younger investor with decades before retirement may choose a stock-heavy allocation, such as 90% stocks and 10% bonds, since they have time to recover from market downturns.

As retirement approaches, many investors gradually shift toward bonds to protect accumulated savings and create reliable cash flow. A traditional rule of thumb is to subtract your age from 110 or 120 to find a starting point for stock allocation. For example, a 40-year-old might hold 70% to 80% stocks.

Lifestyle factors also matter. Someone relying heavily on their portfolio for retirement income may favor bonds, while an investor with other sources of income might remain more stock-heavy. Reviewing your allocation periodically helps ensure it still aligns with your circumstances and objectives.

How to Buy Stocks and Bonds

To buy an individual stock, you can go through a stockbroker, either a human broker or an online brokerage To buy a treasury bond, you can go directly through the U.S. Treasury. You can purchase other types of bonds similarly to how you purchase stocks, through a broker.

Another way to buy stocks and bonds is by purchasing mutual funds or exchange-traded funds (ETFs). Both of these types of funds invest your money in a bundle of investments, creating a diversified portfolio. The investments will either be chosen by a fund manager (active management) or will track an established index like the S&P 500 (passive management).

Bottom Line

Stocks and bonds are two of the most important building blocks for any investor. While stocks offer a higher upside and more risk, bond returns are typically lower but more predictable. Most people will want to allocate their assets among both types of investments, as well as others, to create a diversified portfolio.

Investing Tips

If you’re starting to think about investing and aren’t sure where to start, consider working with a financial advisor who can help with your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re wondering how to split up your investments, see what your portfolio could look like based on your risk profile using SmartAsset’s free asset allocation calculator. This can help you figure out how you want to spread out your assets among various asset classes.