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What is the difference between bonds, stocks and securities?

Anmol Gupta

A not so frequently asked question, but understanding the difference between there terms can take you a long way in understanding finance better.

Security in finance is anything which has some monetary value and which can be traded.

There are two kinds of securities - Equity Securities and Debt Securities.

Equity is related to ownership.

When you purchase a share of a company, you become owner of that company. If the share price goes up, your wealth also goes up and vice versa. If the company makes profit and decides to distribute that profit to shareholders in form of dividends, you also get the dividend in proportion to your shareholding. In equity, you are concerned about performance of the company as that directly affects your wealth as well.

Stocks are equity securities.

Debt is related to borrowing and lending.

Taking loan from a bank is debt. Depositing money in a bank in expectation of interest is again a debt on bank. Similarly, corporates and government also borrow money from people promising an interest on the money borrowed. When you get into such kind of an arrangement with corporates or government i.e. lending them money in expectation of some interest, this agreement is called as bond. In debt, the lender is not really concerned about what the borrower does with the money as long as the lender gets his promised interest.

Bonds are debt securities.

Hope the distinction is clear.

Originally published on Quora.

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About the Author
Anmol Gupta
Anmol is CEO at 7Prosper. He is SEBI Registered Investment Adviser, with expertise in Finance and Technology domains. Anmol is committed to help people achieve their financial freedom.

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