How do stocks differ from bonds?

How do stocks differ from bonds?

• A. Stocks are loans, while bonds are ownership interests
• B. Stocks have fixed returns, while bonds can appreciate
• C. Stocks represent ownership in a company, while bonds are loans
• D. Stocks are less risky than bonds

Answer: (C)

Stocks represent ownership in a company, which means that when you purchase stocks, you are buying a share of that company's equity. This entitles you to a portion of the company's profits and often gives you voting rights, allowing you to influence decisions within the company. On the other hand, bonds are essentially loans made by an investor to a borrower—typically a corporation or government. When you buy a bond, you are lending money to that entity, which promises to pay you back at a specified date, usually with interest. Understanding this distinction is key in personal finance, as it shapes investment strategy and risk assessment. Investors typically view stocks as higher risk but potentially higher reward due to their price volatility and the potential for significant returns through appreciation and dividends. In contrast, bonds are generally seen as more stable, providing predictable income through interest payments, but they don’t offer ownership in the borrowing entity. The other options incorrectly present the relationship and characteristics of stocks and bonds, such as misclassifying one as a loan and the other as an ownership interest, or suggesting that stocks have fixed returns like bonds.

Stocks represent ownership in a company, which means that when you purchase stocks, you are buying a share of that company's equity. This entitles you to a portion of the company's profits and often gives you voting rights, allowing you to influence decisions within the company.

On the other hand, bonds are essentially loans made by an investor to a borrower—typically a corporation or government. When you buy a bond, you are lending money to that entity, which promises to pay you back at a specified date, usually with interest.

Understanding this distinction is key in personal finance, as it shapes investment strategy and risk assessment. Investors typically view stocks as higher risk but potentially higher reward due to their price volatility and the potential for significant returns through appreciation and dividends. In contrast, bonds are generally seen as more stable, providing predictable income through interest payments, but they don’t offer ownership in the borrowing entity.

The other options incorrectly present the relationship and characteristics of stocks and bonds, such as misclassifying one as a loan and the other as an ownership interest, or suggesting that stocks have fixed returns like bonds.