When talking about investing, the two terms “stocks” and “bonds” often come up as a set.
Even if you have a vague impression that “stocks are high-risk and bonds are low-risk,” there are surprisingly few people who can explain how they differ in terms of their fundamental mechanisms.
Understanding the differences between these two will provide a foundation for when you think about your asset allocation (portfolio) in the future.
Last time, we clarified the term “market capitalization,” which is often seen in the news.
This time, we will look at “stocks,” which are the main subject of that, and “bonds,” another representative investment target, side-by-side to see the differences in their respective mechanisms.
Stocks are “investments,” bonds are “loans”
Stocks are issued by companies to raise business capital, and those who purchase them (shareholders) become investors in that company, or in other words, one of its owners.
On the other hand, bonds are issued by national governments, local public entities, and companies to borrow money from investors, and are essentially like “IOUs.”
This difference in position—whether it is an “investment” or a “loan”—is the root of the various differences in the nature of stocks and bonds.
・Stocks: Investment in a company. The purchaser becomes a shareholder (one of the owners).
・Bonds: Loans to a government or company. The purchaser becomes a lender (creditor).
Trivia: The mechanism of a “joint-stock company” was born as a means to collect money from many people to start a large business. It is said that the idea began with the notion that even if an amount cannot be provided by one person, it can become a large amount of capital if many people invest a little bit at a time.
Different ways of obtaining returns
The difference in position between an investment and a loan is also directly reflected in how returns are obtained.
Stock returns are mainly capital gains from increases in stock prices and dividends (income gains) received from a portion of the company’s profits.
Because stock prices fluctuate daily due to various factors such as corporate performance, future expectations, and overall market economic trends, they are characterized by a tendency for a wider range of price movements.
On the other hand, bond returns are mainly interest based on a predetermined rate and the principal returned at maturity (redemption date).
As long as the issuer does not go bankrupt or default, the face value will be returned if held until maturity, so price movements are considered to be generally milder compared to stocks.
In the investment world, it is often explained that risk and return increase in the order of “savings < bonds < stocks,” and bonds are listed as the representative of low-risk/low-return, while stocks are the representative of high-risk/high-return.
Bonds also have risks
What you should be careful about here is that you cannot simply say “bonds are safe.”
First, if the issuer, such as a country or company, falls into financial difficulty or management crisis, there is a possibility that interest or principal payments will be delayed or not paid at all.
This is called credit risk (default risk).
・Credit risk: The risk that the issuer will be unable to pay interest or principal as scheduled
・Interest rate fluctuation risk: The risk that the price will fluctuate if sold before maturity due to changes in market interest rates
・Liquidity risk: The risk that you may not always find a buyer when you want to sell
Among these, interest rate fluctuation risk behaves somewhat counterintuitively.
When market interest rates rise, bonds that have already been issued (with fixed interest rates) become relatively less attractive, so their prices actually fall.
Conversely, when market interest rates fall, the prices of existing bonds rise.
This price fluctuation tends to be greater for bonds with longer periods until maturity.
However, it is a point worth noting that if you hold them until maturity, you will receive the face value amount regardless of these price fluctuations.
Trivia: There are types of “Japanese Government Bonds for Individuals” that individuals can buy in small amounts which are designed not to result in a loss of principal even if redeemed early. This is a unique feature of government bonds for individuals that differs from general bonds traded freely in the market. Since the details of the system may change depending on the time of issuance, it is a good idea to check the latest information on the Ministry of Finance’s official website when considering a purchase.
Treatment when a company goes bankrupt is also different
Another major difference between stocks and bonds is how they are treated when the issuing company goes bankrupt.
In a situation where a company’s assets are liquidated, repayment to creditors, including bondholders, is prioritized first, and if there are any remaining assets, they are distributed to shareholders in that order.
In other words, bondholders (creditors) are in a position to receive repayment before shareholders, whereas shareholders are last in line.
If no assets remain after liquidation, the amount invested by shareholders will not be returned, and the stocks held will become worthless.
・Bond (corporate bond) holders: As creditors, they can receive repayment before shareholders
・Stockholders (shareholders): As investors, they are only distributed the assets remaining after repayment to creditors
This difference in repayment priority is also one of the reasons why stocks are considered higher risk than bonds.
As a foundation for considering asset allocation
Stocks and bonds are considered worth holding in combination precisely because they have different price movement trends.
The idea is that even when one is falling in value, the other may mitigate that decline, which can be expected to have the effect of stabilizing the price movements of the assets as a whole.
Thinking about how to combine the ratio of stocks and bonds according to the “risk tolerance” introduced in a previous article is the basic starting point for asset allocation.
It is not a matter of one being superior to the other; it is important to understand the characteristics of each and consider a balance that suits you.
Summary
The difference in position—stocks being an investment in a company, and bonds being a loan to a country or company—is the starting point for everything.
There is also a difference in how returns are obtained: stocks offer capital gains and dividends, while bonds offer interest and principal at maturity.
Bonds also carry credit risk, interest rate fluctuation risk, and liquidity risk, so they are not unconditionally safe.
There is also a difference in that bondholders have priority over shareholders in the order of repayment if a company goes bankrupt.
Combining stocks and bonds, which have different price movement trends, is the basic foundation for considering asset allocation.
This article is for informational and educational purposes and does not recommend the buying or selling of any specific financial products.
Please make investment decisions at your own discretion and responsibility.
Note that the content regarding the systems and mechanisms of Japanese government bonds for individuals and corporate bonds introduced in this article was confirmed as of September 2026. As the details of the systems may change, please check the latest information on the official websites of the Ministry of Finance and each securities company.
Next time, we plan to cover the concept of “asset allocation” itself—how to combine stocks, bonds, and other assets—in a more concrete way.