Bonds vs. stocks: How each can support your financial goals

Bonds and stocks are two of the main financial tools investors use when building their investment portfolios. Learning how to utilize these tools isn’t about which one is better, though. It’s about understanding each one’s purpose and how they can work together in helping you build the best portfolio for your financial goals. 

While understanding bonds and stocks can get pretty complex, we’re going to break down what each one is, how they work, and how they can work together in forming a complete portfolio, so you can understand the basics of these financial tools to set yourself up for financial success.

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What are stocks?

A stock, also known as equity, is a small piece of ownership in a company. Investors can make money in a few different ways. The two main ways are selling the stock at a higher price than you bought it, known as capital gains, and earning dividends, which are when companies give some of their profits to shareholders.

Individual stocks carry a level of risk based on the performance of the company. This risk comes in many forms. But simply, a company can lose competitive advantage or even go out of business which puts your money at risk. On the flip side, a company can do exceedingly well, make a lot of money, and become very successful, causing your investment to grow. This makes stocks a good consideration for long-term investment plans. 

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Since we don’t know how any one company will perform in the future, diversification is an important strategy for investment portfolios. 

What are bonds?

While stocks represent shares of ownership in a company, bonds represent debt that a company or the government owes you. In essence, when you buy a bond, you are lending the organization money to grow their business or fund government projects. In return, that organization will pay you interest payments over a period of time until they return all of the money that you lent them.

For example, you may buy a 10-year bond for $1,000. That bond may pay you 4% interest, which would typically be paid out to you every 6 months. Since 4% of $1,000 is $40, you would earn $20 of interest every six months. At the end of 10 years, you would receive your initial $1,000 back.

Bonds are generally considered to be safer and less risky than stocks because they typically do not grow in value a lot and you receive consistent interest payments until your money is returned. This typically makes bonds better for short-term investment plans. 

That doesn’t mean they don’t come without risk, though. If the company goes out of business, you could lose your money, just as you would with stocks. However, in this situation, bondholders typically get their money back first if a company goes through bankruptcy. Also, because investors aren’t aiming for growth with bonds, they typically purchase bonds from well-established companies or the government, helping reduce this risk. 

Key differences between bonds vs. stocks

Here’s a quick breakdown to illustrate the differences between the two:

Key considerations

There are a variety of factors to consider when making investment decisions, but here are two main ones when deciding whether to invest in stocks or bonds:

• Time horizon: Typically for long-term goals (10 to 15+ years), it’s common to have a higher concentration of stocks. For shorter-term goals, bonds are a common investment.

• Risk tolerance: Stocks come with more risk for more growth potential, while bonds include less risk with more of a focus on preserving money.

Using both in your portfolio

After weighing those considerations, you can decide how to balance your portfolio between the two. Some investors may utilize all stocks or all bonds, but a lot of investors will use a combination of both. 

Historically, this has been shown to help investors find success in many different types of stock markets. When stock markets are performing well, stocks are typically growing and the value of your portfolio increases. When it’s performing poorly, the stability and interest payments from bonds can help keep your portfolio afloat, essentially providing a balance. 

For example, a popular portfolio split is the 60/40 portfolio, which means your portfolio has 60% stocks and 40% bonds. Some investors consider this the “all-weather” portfolio allocation, helping investors achieve steady returns without taking on too much risk. 

Of course, every investor is different and past performance does not guarantee future returns.

Examples by goal

To give you a general idea, here’s how you might think about allocating between the two:

• Long-term growth (i.e. retirement, future wealth): You may focus on all, or mostly, stocks. 

• Mid-term goals (i.e. college, car, home): You may focus on all, or mostly, bonds, depending on how much time you have until your goal.

• Short-term safety (i.e. emergency fund, cash flow): You may utilize some bonds, but your focus will typically be on having cash first.

Learn more about how to diversify your portfolio.

Finding the right investments for you and your family

Above all, the key is determining the right investments and allocations for you and your family. Now that you know the difference between stocks and bonds, you have a better understanding of how they may help you achieve your goals.

Having the right tools and financial education will help you get and stay on track. Greenlight’s investing platform* not only gives kids and parents an easy-to-use system to learn investing basics, but it also comes with a suite of features to help teach your kids money basics and beyond.

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**© 2025 Greenlight Investment Advisors, LLC, an SEC Registered Investment Advisor provides investment advisory services to its clients. Investing involves risk and may include the loss of principal. Investments are not FDIC-insured, are not a deposit, and may lose value.