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What is the difference between stocks and bonds?

Author:
Harold Averkamp, CPA, MBA

Definition of Stocks

Stocks, or shares of capital stock, represent an ownership interest in a corporation. Every corporation has common stock. Some corporations issue preferred stock in addition to its common stock. Shares of common stock do not have maturity dates.

Stocks pay dividends, which are a distribution of the corporation’s profits to its owners. However, the dividend occurs only if the corporation’s board of directors declare the dividend. The dividend payments are not an expense on the corporation’s financial statements or on its U.S. income tax return.

Definition of Bonds

Bonds are a form of long-term debt in which the issuing corporation promises to pay the principal amount at a specified maturity date.

Bonds also promise to pay a fixed interest payment to the bondholders usually every six months until the bonds mature. In the U.S. the interest paid to the bondholders by the corporation is a deductible expense on the corporation’s income tax return.

Typically businesses do not issue bonds.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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