Bonds vs shares – what’s the difference and how do they work?

Bonds and shares are some of the most traded types of investment. With stubborn inflation and the highest interest rates for 15 years, bonds have re-emerged into the spotlight with yields in focus.

But, what’s the difference between bonds and shares?

This article isn’t personal advice, if you’re not sure whether an investment is right for you, ask for financial advice.

All investments, including any income from them, can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not a guarantee of future income.

Investing in bonds

What are bonds? 

A bond is a fixed-income investment where investors lend money to governments or companies for a set period in return for regular interest payments.

In return for the loan, the borrower will agree to pay the lender regular interest payments – usually once or twice a year. These are called coupon payments.

When the bond ends, also known as the maturity date, the original investment loan is paid back to the lender. Most bonds are issued with long-term borrowing in mind, between five and 50 years.

What’s a yield?

A yield measures the income from an investment over a set timeframe compared to the price. It can give an investor a rough idea as to what their interest payments will look like.

For example, the nominal yield is also called a coupon rate. This is the rate that the bond issuer will be paying to the investor as interest in return for borrowing money from them. It’s calculated by dividing the annual interest payments by the issue price.

If you buy a bond after it’s been issued, the nominal yield won’t be accurate for measuring what you’d be receiving as interest. Instead, you should look at the running yield.

The running yield is calculated by dividing the annual interest by the current bond’s price, expressed as a percentage. This is usually a better way to check the percentage yield you’ll receive for the price you pay for the bond.

Bonds in practice

Unlike shares, you own debt in a company rather than a slice of the company. You won’t get a say in how the company is managed as you won’t have voting rights. In return, you receive regular payments as interest on your ‘loan’ and at the end of this loan, the maturity date, you receive the amount you invested back in full.

There are different types of bonds as well. Inflation-linked bonds’ coupon payments keep pace with inflation. Bond funds are collective investments managed by an expert.

Bonds are typically seen as ‘safer’ than shares. They tend to be less volatile than shares and they normally get paid first if the company becomes insolvent. 

Bondholders need the government or company to have enough cash to repay the loan and service the debt, whereas shareholders rely on company profits.

The risk of the UK or other major governments not being able to repay their debts is low, but they’re not totally risk free. It’s not uncommon for corporate bond issuers to go bust, especially in smaller, less established companies.

While it doesn’t happen very often, if the bond issuer defaults, investors risk losing their entire investment.

Investing in shares

What’s a share? 

A share traded on the stock market represents part-ownership of a public limited company (PLC). As a shareholder you own a piece of the pie, which can be sold to other investors.

As part of this, you’re entitled to a say in how the company operates. You can attend annual general meetings (AGMs), vote on corporate actions like rights issues and get shareholder perks like discount cards.

Shares in practice

Both bonds and shares are traded frequently, but shares will typically grow more over time than bonds. Though of course performance is never guaranteed.

Shares can also pay out money to investors through dividends, though never guaranteed. A company can choose to do this when they’ve had a profitable year or to reward investors. The main difference between bonds here is that dividends are variable, while a bond will pay a regular income in the form of its interest payments.

The key takeaways

There are two main differences between bonds and shares to take away.

Ownership

As a bondholder, you’re lending money to the company or government. As a shareholder, you own a part of the company and can have your say in AGMs.

Investing goal

Bonds will typically pay a regular income to the investor through interest payments while shares usually offer more capital growth with the possibility of income from dividends. Bonds are usually less risky than shares.

How to get started investing in bonds

You can buy bonds and shares directly or through collective investments, like funds managed by an expert.

HL Global Corporate Bond fund

If you’re not sure where to start, we’re launching our newest fund, managed by our experts and investing in corporate bonds from around the world. Invest before 11:59pm, 19 July to get the fixed launch price of £1 per unit.

Start with just £100, or set up a Direct Debit to invest after launch from as little as £25 per month.

Find out more

HL’s building block investments are managed by our sister company Hargreaves Lansdown Fund Managers Ltd.

Our Wealth Shortlist

You could also use our Wealth Shortlist to find bond funds our research analysts think offer great performance potential.

See the Wealth Shortlist

What’s next for bonds in 2023? – Expert views from HL’s fund managers