Lessons · Instruments · Beginner
Bonds vs stocks
Bonds are loans with contractual payments. Stocks are ownership with upside - and deeper loss potential.
8 min read
What you will learn
- Contrast debt claims vs equity claims
- See how rising yields hit bond prices
- Understand when stock/bond diversification fails
Key terms
- Bond
- A loan to an issuer with defined interest and principal terms.
- Duration
- Sensitivity of a bond's price to interest-rate changes.
- Credit risk
- The risk the issuer fails to pay as promised.
1. Different claims
Bondholders are lenders. Stockholders own what remains. In distress, bonds usually rank higher; in strong growth, equity captures upside bonds do not.
2. Rates and bond prices
When yields rise, existing lower-coupon bonds usually fall in price. Longer duration means larger swings.
3. The classic mix - and its failure mode
Stock/bond mixes aim to smooth the ride. Inflation shocks can hurt both at once, which is why cash or short duration sometimes enters the toolkit.
Why bond prices fall when yields rise
A bond paying 2% looks less attractive when new bonds pay 4%. Its price falls until its yield is competitive again.
Common mistakes
- Assuming bonds always rally when stocks fall
- Ignoring duration risk inside safe bond funds
- Treating stock/bond mix as set-and-forget through inflation shocks
Try this on StockWatch
- Watch rate-sensitive sectors around FOMC and CPI weeks
- Use cross-assets for a quick risk-on/risk-off read
- Keep policy catalysts visible on Upcoming