Investment Vehicles: Stocks, Bonds & Funds

Every company that needs money to grow has two fundamentally different ways to raise it: sell ownership, or borrow. A stock is a slice of ownership. A bond is a loan with a promise to pay it back. Every investment vehicle you will ever use is built from one of these two ideas, or from a basket of them.

When a company sells stock, it gives up a permanent slice of itself in exchange for cash it never has to repay. Shareholders get no fixed promise — they get whatever is left over after everyone else is paid, which could be enormous or could be nothing. When a company sells a bond, it borrows a fixed amount and promises to pay fixed interest (the coupon) plus the original amount back (the principal) on a set date. Bondholders get a contractual promise, not a share of the upside.

This difference shows up most starkly when a company gets into trouble. In bankruptcy, there is a strict order of who gets paid first: secured lenders, then unsecured bondholders, then, if anything at all is left, shareholders. Bondholders are creditors. Shareholders are owners — and owners are last in line, because ownership means claiming what's left over, not a guaranteed cut.

Think of a company like a house bought with a mortgage. The bank that loaned the money (the "bondholder") gets paid every month no matter what the house is worth, and gets first claim if the house is sold. The homeowner (the "shareholder") only gets whatever value is left after the mortgage is paid off — which could be a lot if the house appreciated, or nothing if it didn't.