Stocks and bonds, like Frick and Frack and Abbot and Costello.  You rarely think of one without the other.  But what exactly are the differences between stocks and bonds? Actually, though they do share some core similarities, in many ways they are very different types of investments. Like stocks, bonds are sold by corporations and can be traded on the open market.  Bond interest rates also fluctuate and are subject to the volatility of market conditions. But the similarities tend to end there.

Stocks and bonds are very different in terms of risks and rewards. Each share of stock purchased represents ownership in a company. As part owner, you share profits as well as losses with that company, depending on its success or failure. This means that, though some stocks are safer than others, all stocks, by nature, carry some inherent risks to them. The flip side of this coin, of course, is that stocks have the potential of large returns and profits.

When you purchase corporate bonds, on the other hand, you are basically loaning money to that corporation. You become one of their creditors, and in return you are given a fixed rate of interest over a fixed period of time. There is little risk of losing money when investing in bonds unless the company goes completely belly up, and even then, the risk of not being paid back is low. Of course, there is no potential for wild profits with bonds either.

The differences between stocks and bonds tend to complement each other, which is perhaps why they go so perfectly together. Most financial planners agree that a good investment portfolio should always contain both stocks and bonds.