Difference Between Stocks and Bonds

The biggest question in the world of investment is where to invest money stocks or bonds? Many people hear these two words but do not understand their real difference. Actually, knowing the difference between stocks and bonds is as important for any investor as knowing the direction before starting the journey. In this blog, we will understand in simple language what is the basic difference between stocks vs bonds, how both work, and why they should be looked at together while deciding the investment strategy.

What Are Stocks and Bonds?

What are stocks?

Stocks are the ownership of any company. When an investor buys stocks of a company, he becomes a shareholder of that company. This simply means that a part of the company's earnings and growth also gets associated with him.

Way of earning:

By increasing share price: If the company performs well, the price of its stock increases and the investor gets capital gain.

By dividend: Many companies give a part of their earnings to shareholders in the form of a dividend.

Risk : The stock market is volatile. Economic conditions, company's business performance and global events affect the stock price.

Example: Suppose someone bought shares of Reliance Industries Ltd. If Reliance's earnings increase and the share price increases from Rs. 2,500 to Rs. 2,900, then the investor gets a direct gain of Rs. 400 per share. On the other hand, if the company incurs a loss, the share price may also fall.

What are bonds?

Bonds are actually a type of loan instrument. When you buy a bond, you lend your money to a company or government. In return, you get fixed interest (fixed interest/coupon) at a fixed time and your principal is returned on maturity.

Way of earning:

Fixed interest: Bonds provide regular income, which is generally stable compared to shares.

Low risk: Since bonds have a pre-fixed return, they are considered a safe investment.

Example: Suppose you bought a 10-year government bond of the Government of India, on which 7% annual interest is fixed. If you bought a bond of Rs. 1,00,000, then every year you will get Rs. You will get Rs. 7,000 as interest and after 10 years you will get your full Rs. 1,00,000 back.

Stocks vs Bonds: Key Differences

Investors often wonder which is the better option between stocks and bonds. Actually, both are different in nature and both serve different investment objectives. The table below shows the main differences between them.

The Risk-Reward Equation

Every investment option carries with it a balance of risk and reward. Stocks and bonds are very different from each other in this regard.

Stocks : Investing in stocks means the possibility of high returns, but also great risk. Share prices fluctuate constantly, and sometimes there can be a sudden drop. If the company performs well, the investor gets huge profits, but in adverse circumstances the loss can also be huge.

Example: A tech company's stock can double in a few months, but if the company suffers a loss, the same stock can fall to half the price.

Bonds : Bonds are considered a stable and safe investment. In these, the investor gets regular fixed interest (fixed income) and gets the principal back on maturity. But the downside is that the return of bonds is limited - that is, there is no possibility of earning a very big profit.However, inflation can have an impact on bonds. If the inflation rate is higher than the interest rate, the real return decreases.

Example : During the 2008 global financial crisis, stock prices fell sharply, investors lost wealth overnight. But at the same time, government bonds became a safe option and many investors took refuge in bonds to save capital.

Market Behavior: Stocks and Bonds in Different Cycles

Markets are not always the same. Sometimes there are periods of bull market, sometimes there is a period of bear market. At such times, the behavior of stocks and bonds is completely different.

Stocks dominate in a bull market : In a bull market, the economy improves and investor confidence increases, leading to a boom in the stock market.

Example: After the first wave of Covid, Sensex and Nifty rose sharply when the economy reopened; Nifty 50 recovered sharply after falling in March 2020, and confidence returned to the market.

Role of bonds during a bear market or recession : When stocks fall, investors turn to safer options such as government or high-rated corporate bonds to reduce risk.

Example : At the beginning of the Covid-19 pandemic, market volatility was so high that both stocks and bonds sold off; however, stability began to return to the bond market later, especially government bonds.

Hedge Function : When stocks fall, bonds often cushion some of the losses because they have stable interest rates and low risk. This balance (hedge) is very important for a prudent investor.

Portfolio Diversification: Why You Need Both

Balanced Asset Allocation : Diversification is all about spreading investments across different asset classes like stocks and bonds. This balance ensures that the portfolio does not rely on a single source of return.

Risk Management : When one asset class underperforms, the other can provide stability. Stocks offer growth potential but carry volatility, while bonds reduce overall risk by providing consistent income.

Stability with Growth : A mix of equities and fixed income instruments creates an opportunity for growth while maintaining portfolio stability. This helps investors achieve steady progress towards their financial goals.

60/40 Investment Approach : A commonly followed strategy is the 60/40 rule, where 60% of the portfolio is invested in stocks for growth and 40% in bonds for security. This ratio can be adjusted depending on risk appetite and financial objectives.

Aligning with Risk Tolerance : Every investor has a different comfort level with risk. Diversification allows tailoring the portfolio to match personal risk tolerance, ensuring confidence in both good and volatile market phases.

Long-Term Wealth Building : A well-diversified portfolio ensures smoother returns over the long run. By balancing safety and growth, investors can steadily build wealth without being overly exposed to market swings.

Bonds vs Stocks: Taxation Angle

While investing, it is not enough to focus only on returns, but taxation is also an equally important aspect.

Short-term capital gain (STCG) – on stocks

If you sell an equity share after holding it for less than a year, it is taxed at 20%. Earlier this rate was 15%, but it has been changed.

Long-term capital gain (LTCG) – on stocks

If the share is held for more than a year, then long-term capital gain tax is applicable. From 2025:

• Now the LTCG tax rate has become 12.5% ??(was 10% earlier).

• Exemption is available on gains up to ?1.25 lakh annually (earlier this exemption was ?1 lakh).

Dividend Income

Earlier, dividends were subject to Dividend Distribution Tax (DDT), but now it has been completely abolished. As per today's rules:

• Dividends are added to the investor's personal income.

• It is taxed as per your income tax slab.

Taxation on Bonds

• Interest Income: Interest from bonds is fully taxable and is added to the investor's total income. It is taxed as per the slab rates.

• Tax-free bonds: Interest on bonds issued by certain government entities like PFC, IRFC, etc. is completely tax-free (under Section 10(15) of the Income Tax Act).

How to invest in shares and bonds?

How to invest in stocks?

• Open a Demat and Trading Account : To invest in stocks, first of all you need a Demat and Trading account. An account can be opened easily with a registered broker like Rupeezy.

• Research the company and sector : Before investing in any stock, it is important to study the company's financial reports, management quality and future growth.

• Choose long term or trading : Investors can choose long-term investment (wealth creation) or short-term trading (quick returns) according to their goals.

• Invest smartly with Rupeezy's facility :Rupeezy gives its investors T+7 days interest-free 5X margin and 5X leverage in MTF (Margin Trading Facility). This means that you can make big investments even with less capital.

• Monitor and diversify investments : The stock market is dynamic, so review your portfolio from time to time and keep the risk balance by investing in different sectors.

How to invest in bonds?

• Investment through Bank : You can buy bonds through banks, financial institutions.

• Choose Government and Corporate Bonds : Government bonds are considered relatively safe, while corporate bonds give slightly higher returns but there is also risk.

• Advantage of Fixed Income : Bonds give fixed interest income, which is good for those investors who want regular income.

• Pay attention to Holding and Redemption : The maturity period of bonds varies. While investing, it is important to pay attention to duration and interest rate.

Conclusion

Both stock and bond investments are important tools for investors to grow capital and generate steady income. Investing with the right information and planning can lead to financial security and better returns. Wisely chosen investments can prove to be the key to financial success in the long run.

FAQs

Q1. What is the difference between shares and bonds?

Shares give you a share in the company while bonds are a type of loan on which you get a fixed interest.

Q2. Is investing in shares risky?

Yes, the stock market fluctuates, but proper research and long-term investment can give good returns.

Q3. Are bonds safe for investment?

Yes, bonds are considered safer than shares as they give fixed returns.

Q4. How can I start investing in shares ?

One can easily start investing by opening a demat and trading account with brokers like Rupeezy.

Q5. Can I get margin facility on investments?

Yes, Rupeezy offers interest-free 5X margin up to T+7 days and 5X limit on MTF as well.