What Is a Bond? — 5 Decisive Differences From Stocks

When you start investing, the first two words you encounter are 'stocks' and 'bonds.' Yet when someone actually asks, "What is a bond?", it's surprisingly hard to answer clearly. Here it is in one sentence. A stock is 'buying an ownership stake in a company,' while a bond is 'buying an IOU that lends money to someone in exchange for interest.' This one-line difference splits everything — the profit structure, the risk, and the order of priority. Today, let's unpack that difference step by step, with numbers.

A Bond = an Interest-Bearing 'IOU'

A bond is a 'debt certificate' issued by a government, public institution, or company to borrow money. Over a set period (the maturity), the issuer pays a promised interest amount (the coupon rate), and when maturity arrives, it returns the borrowed principal (the face value). For example, suppose you buy a bond with a face value of 1 million KRW, a coupon rate of 4% per year, and a 3-year maturity. You receive 40,000 KRW in interest each year, and after 3 years you get back the 1 million KRW principal. The total you receive works out to 120,000 KRW in interest + 1 million KRW principal = 1.12 million KRW. The key point is that, as long as the issuer doesn't default, the amount you'll receive is fixed from the very start.

A Stock = a Company Stake, With Nothing Fixed

In contrast, when you buy a stock, you come to own a piece of that company. There is no fixed interest and no principal to be returned. If the company does well, the share price rises and you may receive dividends, but if earnings sour, the share price can be cut in half or the dividend can stop altogether. Stocks worth 1 million KRW could become 1.5 million KRW a year later — or 600,000 KRW. There is no upper limit, but the lower limit is weak too. In short, a bond offers 'returns that are fixed but capped,' while a stock offers 'returns that are unlimited but uncertain.'

If the Company Goes Under, Who Gets Paid First?

The decisive difference between the two shows up in the 'order in which money is repaid.' When a company goes bankrupt and liquidates its assets, the debt (bonds) is repaid first, and only if anything is left over is it distributed to shareholders (stocks). In other words, bondholders rank ahead of shareholders. That's why, for the same company, bonds are considered safer than stocks. That said, 'safer' is only ever relative, and if the issuer defaults, even a bond can lose its principal. The indicator that shows a bond's risk is precisely the credit rating (AAA is the safest; anything BB or below is speculative grade).

5 Differences at a Glance

• Nature: a bond is money you've lent (creditor) / a stock is an ownership stake (shareholder)
• Source of return: a bond pays interest + principal at maturity / a stock pays capital gains + dividends
• Volatility: a bond is relatively low / a stock is high
• Priority in bankruptcy: bondholders come first, shareholders come last
• Maturity: a bond has a set maturity / a stock has none (you can hold it indefinitely)

Why Do Bond Prices Fall When Interest Rates Rise?

This is the part beginners find most confusing. If you hold a bond to maturity, you receive the promised principal, but you can also buy and sell it in the meantime. The thing is, when market interest rates rise, newly issued bonds pay higher interest, so already-issued 'low-interest' bonds lose popularity. For example, if you hold a bond paying 3% per year and market rates rise to 5%, you'll have to discount the price to sell your 3% bond. That's how the inverse relationship of 'rates rise → existing bond prices fall' arises. Remember that if you hold to maturity this fluctuation has no effect on your profit or loss, but if you sell early you can incur a loss.

So How Should You Mix Them? — Asset Allocation

The answer isn't 'one of the two' but 'mixing the two.' Stocks and bonds tend to move in different directions, so holding them together reduces overall volatility. A commonly used starting point is the formula 'stock weighting = 100 − your age.' At age 30 that's 70 stocks : 30 bonds; at age 60, 40 stocks : 60 bonds — increasing your stable assets as you get older. It's by no means an absolute rule, but it helps you develop the basic instinct of 'diversified investing,' adjusting risk to fit your own investment horizon and temperament.

1. First, decide your investment horizon and risk tolerance (when will you need this money?)
2. Sketch out the big picture of your stock : bond ratio (e.g., 60:40)
3. Don't pile into a single holding; diversify across many holdings and countries
4. Check once or twice a year whether the ratio has drifted, and rebalance

With a stock you buy a company's 'dream'; with a bond you buy a company's 'promise.'

To sum up, a bond is a 'stability-oriented asset that pays fixed interest and principal,' while a stock is an 'uncertain asset with large growth potential.' Neither one is absolutely right; the key is to adjust the ratio to fit your goals, horizon, and temperament. This article is reference material to aid conceptual understanding, not a solicitation to invest. Before any actual investment, please be sure to check the product prospectus and your own circumstances.