What Are Bonds?
When people talk about financial things, you tend to hear the term stocks and bonds thrown around, but are they the same thing? The short answer is no. Stocks and bonds are different entities although they belong in the same financial framework as they are both things to make money and both things that can be bought and sold.
Bonds by definition are an instrument of indebtedness. While that doesn’t sound very appealing and not very much on the side of making money, in fact they are used to make money. It is a case of debt security. Your company wants financing and so to get that you get into the bond market.
The issuer holds the holder debt and then pays interest and/or repays the loan at a later date. Think of it like a regular loan, only the time you have to repay them can vary largely, most have a 30 year term, some have upwards of 50 years and some don’t have a maturity date at all.
You, if you hold bonds will have to pay interest at fixed times throughout the term, usually on a regular basis and they, in turn will fund your endeavors to finance long term investments. Regular small businesses wouldn’t necessarily have to go down this road, but large conglomerates and the government itself do.
The bond is a form of a loan, albeit a large one. The holder of it is called the lender (think bank or larger) while the issuer is the borrower. Banks aren’t the only institutions that can issue bonds, as public authorities, credit institutions and companies can also do it to build their wealth.
The common process is one of underwriting, where one or more securities firms join together to form a syndicate. This syndicate then buys an entire issue of bonds from the issuer and then resells them to investors around the world. This is the case for many transactions, however, the government has bonds issued at auction which is a whole other issue entirely.
While both stocks and bonds are securities, they do differ in how they are bought, how they are sold and how they are traded. Stocks for instance don’t have a maturity date that you have to pay them off by as they are things you purchase in the first place. Having stock in something is a whole other idea to having a bond in it.