What's the Difference Between Investing in the Bonds (or Debt) Versus the Shares (or Equity) of a Company?

Updated on May 2, 2020
Cruncher profile image

Cruncher is the pseudonym of an actuary working in London with experience in insurance, pensions and investments.


You might think that it doesn't make much difference whether you invest in a company's shares or its bonds. After all, it's the same company paying you in either case. So surely it just depends on how well that company does. Of course, it does depend on the company's performance. But don't be fooled. Investing in corporate bonds and shares give very different investment risks and returns, even if it is in the same company.

The Difference in a Nutshell

The difference between shares and bonds is this:

  • Shareholders own the company. That's why shareholders are sometimes described as owning equity in the company, and so shares are sometimes known as equities.
  • Bondholders loan money to the company.

This fundamental difference explains all the differences I will go into in this article, so keep it in mind as you read on.

What Do Bondholders and Shareholders Get?

Bondholders are owed money by the company. So they are paid interest on the loan at regular intervals (called coupon payments) and then they get the loaned money (the principal) back at the end of the agreed loan period (the term of the bond).

Shareholders own the company. They can expect to make money from their ownership in a couple of ways. They can expect to get paid a share of the profits after any costs (including the cost of paying bondholders). These payments to shareholders from company profits are called dividends. Shareholders may also be able to sell their shares at a profit if the share price has done up.

Risks of Bonds and Shares

This basic difference also means that bondholders and shareholders have different risks, even when they have invested in the same company.

The big risk for a corporate bond investor is that the issuer defaults; in other words, he can't or won't pay the interest on the bond and/or pay the initial loan back at the agreed time.

The big risk for a shareholder is that the company goes bankrupt and their investment is worthless.

If the company is bankrupt, creditors like bondholders will be paid before any leftover money is paid to the shareholders. So if anything goes wrong the bondholders are more likely to get their money back than shareholders.

Also, bondholder's interest payments are fixed and will be paid unless the company defaults (which most companies will desperately try to avoid). Dividends paid to shareholders are not (usually) agreed in advance and can be reduced or even not paid at all if the company is struggling.

On the other hand bond payments might have their value eroded by inflation, whereas company profits and so dividends at least have the chance of going up with inflation

But remember there is an advantage to diversifying your investments between different kinds of investment assets.


Returns From Bonds and Shares

As a general rule higher investment risks are rewarded with higher investment returns. Since bondholders get their money back before shareholders do if it all goes wrong, it's not surprising to learn that most of the time long term returns are higher for shares than bonds in the same company.

If the company does not default then a bondholders returns are fixed. The interest payments are agreed and won't change.

A shareholder on the other hand will get either dividends (which are decided in the future by the company and not agreed in advance) or could sell their share for a capital gain if the price has gone up. (Have a look at this article about the difference between income and capital gains.) This means that the return to shareholders is not guaranteed and could be lower or higher than expected. It also means there is no limit to how much the money the shareholder could make - if the share price rockets up their returns could be enormous.

Find out more about the advantages and disadvantages of investing in either bonds or equities/shares in these articles.

The pros and cons of investing in corporate bonds

The pros and cons of investing in shares

And if you are interested in exploring further, there are different kinds of shares, including preference shares, which are like a cross between shares and bonds.

Good Luck

Corporate bonds and shares offer different risks and rewards and both could be the right choice for you depending on your situation. Understanding what exactly you are investing in and how it works will give you the best chance of finding investments that are suitable for you.

As with any investment always do your research before investing and be very cautious with money you can't afford to lose. Good luck and happy investing.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2013 Cruncher


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://maven.io/company/pages/privacy

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)