University of Central Florida (UCF) FIN2100 Personal Finance and Investments Midterm 2 Practice Exam

The primary difference between stocks and bonds lies in their fundamental nature: stocks represent ownership in a company, while bonds represent a loan made to a borrower, typically a corporation or government entity. When you own stock, you hold a share of the company, which gives you a claim on part of the company's assets and earnings. This ownership can lead to dividends and capital gains if the company's stock price appreciates.

In contrast, when you invest in bonds, you are essentially lending money to the issuer of the bond with the expectation of receiving interest payments and the return of the principal at the bond's maturity. Bonds do not represent any ownership in the entity; instead, they reflect a creditor relationship.

Understanding this distinction is crucial for investors as it impacts the risk profile and potential returns of these investments. Stocks tend to have higher volatility and can offer greater returns over the long term, while bonds typically provide more stable income through interest payments, but without the ownership stakes that stocks provide.