Stocks vs. bonds

Stocks

• Stocks are simply shares of individual companies. When a company issues stock, it is selling a piece of itself in exchange for cash
• Say a company makes it through its start-up phase and becomes successful. The owners wish to expand, but are unable to do so solely through the income they earn through their operations. As a result, they can turn to the financial markets for additional financing
• One way to do this is to split the company up into shares, and then sell a portion of these shares on the open market in a process known as an initial public offering, or IPO
• A person who buys a stock is buying an actual share of the company, which makes them a partial owner—however small. It's why stock is also referred to as equity
• The owner shares in the profits and losses of the company
• Someone who invests in the stock can benefit if the company performs very well and its value increases over time. 
• At the same time, they run the risk that the company could perform poorly and the stock price could fall or, in the worst-case scenario (bankruptcy), disappear altogether.

Bonds

• Bonds, on the other hand, represent debt. 
• When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the money
• A government, corporation, or other entity that needs to raise cash will borrow money in the public market and subsequently pay interest on that loan to investors
• Each bond has a certain par value (say, $1,000) and pays a coupon to investors. For instance, a $1,000 bond with a 4% coupon would pay $20 to the investor twice a year ($40 annually) until it matures. 
• Upon maturity, the investor is returned the full amount of their original principal, except for the rare occasion when a bond defaults (i.e., the issuer is unable to make the payment).
• Bonds lack the powerful long-term return potential of stocks, but they are preferred by investors for whom income is a priority. Also, bonds are less risky than stocks.
• While their prices fluctuate in the market, the vast majority of bonds tend to pay back the full amount of principal at maturity, and there is much less risk of loss than there is with stocks.