What feature of Bonds differentiates them from Stocks?

Bonds are fundamentally different from stocks in that they establish a creditor relationship between the bondholder and the issuer of the bond. When an individual purchases a bond, they are lending money to the issuer, which can be a corporation, government, or other entity. In return for this loan, the issuer agrees to pay back the principal amount at a specified maturity date along with periodic interest payments, known as coupons.

This creditor relationship signifies that bondholders have a claim to the issuer's assets before stockholders in the case of liquidation, making bonds generally considered a safer investment compared to stocks. Stocks, in contrast, represent ownership in a company and offer stockholders the potential for dividends, reflecting their share of the company's profits, as well as varying levels of risk depending on the company's performance.

Understanding the structural differences between bonds and stocks is crucial for financial counseling, as it affects investment strategies, risk assessment, and portfolio diversification.