Video [9:20 min]: Bonds vs Stocks

Synopsis: What are the key differences between stocks and bonds?

As described in Section 16.6, stocks, bonds, and other securities trade in securities markets. But what exactly is a stock and what is a bond?

Similarly to debt and equity financing, as discussed in prior Sections,16.4 and 16.5, a stock is about ownership, and a bond is about debt, so it is essentially a loan. Both stocks and bonds fall under the category of securities, but they impact a business’s financial standing in very different ways.

Watch the Khan Academy video after going back to Sections,16.4 and 16.5 to review that content, and then re-read Section 16.6. Can you explain the distinctions between a primary and a secondary market for stocks? (Hint: primary = new, as in an Initial Public Offering (IPO), and secondary = used, or already issued). Remember: stocks are also called equities because the buyer receives a part ownership in that company.

Are you able to identify the key features of bonds that distinguish their investment potential from equities (stocks)? What about the different kinds of bonds, such as corporate, municipal and particularly government bonds? U.S. government bonds are considered to probably have the lowest risk of most bonds, whereas “junk” bonds would have the highest. What would be some of the reasons why companies would issue “junk” bonds, and what would also be the main motivating factor for buyers to consider purchasing them, despite the higher risk?