Share and Bond Trading - Differences and Similarities

Most, if not all, newbies to the investment scene will ask about the differences and similarities between share and bond trading. The question is a valid one simply because the decision to invest in either shares of stock or certificate of bonds will largely depend on which one provides for the best opportunity to achieve your investment goal. Keep in mind that your investment goal will change as you grow older from the high risks taken at a younger age to the low tolerance for risks at retirement - or vice versa, for that matter.

Read on and find out which area of investments you are more suited between stocks and bond trading.

Nature of Ownership

Let's start this share and bond trading comparison with the nature of ownership as it relates to the basic accounting equation of "assets plus liabilities equals owners' equity" from the standpoint of the issuing entity. Shares of stock form part of owners' equity because once you purchase these securities, you become one of the owners of the issuing entity, namely, the corporation.

Certificate of bonds, in contrast, are debt securities and, hence, fall under the liabilities section of the abovementioned equation. You then become a creditor of the issuing entity.

Players of the Market

Since stocks are ownership securities, the players are corporations as issuing entities, stockholders as the owners of the shares, and stockbrokers as the middleman between these two players of the stock market. This is a relatively simple set-up where sellers meet buyers through a middleman.

The players in the bond market are more numerous. The issuers can be any legal entity in the public and private sectors including but not limited to federal, state and municipal governments; foreign governments from Afghanistan to Zimbabwe; and corporations, big and small.

Place of Trading

One of the two main differences between share and bond trading lies in the place of trading itself. On one hand, stocks are bought and sold over central places known as stock exchanges of which the foremost examples are the New York Stock Exchange, Nasdaq, and AMEX, among others, all of which are regulated by the Securities and Exchange Commission. Take note, too, that most countries have their own national exchanges like the London Stock Exchange and Tokyo Stock Exchange.

On the other hand, bonds are not bought and sold over central exchanges. Instead, these are mainly sold in an over-the-counter fashion from the issuing entity themselves or from authorized financial institutions like banks and credit unions. As such, there are no equivalent bond brokers to the stock brokers.

Return on Investment When Dealing With Share And Bond Trading

The second main difference between share and bond trading lie in the return of investment, which is the most important part in your decision to invest. Again, your decision will largely rest on your investment goals for the short- and long-term periods.

If you are primarily interested in present income with low levels of risk even if it means lower returns, then bonds are your best option. If you are into faster equity growth and you are willing to take high levels of risk, then stocks are your best bet.

However, we must emphasize that a good investment portfolio must have both stocks and bonds. Thus, you will most likely want to learn the principles and practices of both share and bond trading.