Stocks vs. Bonds: How Their Risks and Rewards Differ

Stocks vs bonds comes down to owning versus lending. A stock gives you a share of ownership in a company, which can pay you through a rising share price and dividendsdividend: A portion of a company's profit paid out to its shareholders, usually in cash. A dividend is not free money: the share price tends to fall by about the payout when the share goes ex-dividend, and the tax on it depends on the country.Full entry in the glossary.¹ A bondbond: A loan to a government or company that pays the lender interest, usually at a fixed rate, and repays the amount lent on a set date. Bond prices move when interest rates change, and the borrower can fail to pay, so a bond can lose value.Full entry in the glossary is a loan to a company or government, which promises interest during the bond’s life and your money back when it matures.² Over long periods stocks have earned far more than bonds: after inflationinflation: A general rise in the prices of goods and services over time, so that the same amount of money buys less. Returns are often reported after inflation, in real terms, to show what a gain is worth in buying power.Full entry in the glossary, US stocks gained 6.6 percent a year from 1900 to 2025 and bonds 1.6 percent, according to the 2026 edition of UBS’s Global Investment Returns Yearbook.³

Neither one is simply the safe choice. Bonds usually swing less in price, but they carry risks of their own (rising interest rates, inflation and default), and in some years both fall together. Which one suits a goal depends mostly on when you will need the money, and the table of situations further down sets out how that usually reads. Accounts, fees and the first practical steps are in the WiserHours starter guide for new investors; the two assets are compared here, and neither is recommended.

Stocks vs bonds at a glance: owning versus lending

A stockholder owns part of a business and a bondholder has lent it money, and almost every other difference between the two follows from that. The SEC’s Investor.gov describes a bond as an IOU: the issuer, which may be a government, a city or a company, promises a set rate of interest, typically paid on a schedule such as every six months, and repays the face value when the bond matures.²

The owner’s upside has no ceiling and no promise; the lender’s payout is fixed in advance and capped. A bakery chain that doubles its profits can raise its dividend and see its share price climb, while its bondholders receive exactly the interest they were promised. If the bakery struggles, the dividend can shrink or stop, while the interest stays owed. Dividends have mechanics of their own, from the board’s decision to the payment date, set out in what dividends are and how they reach you.

Before buying either, ask what you are owed if things go badly. A stockholder is owed nothing fixed; a bondholder is owed a schedule of payments that depends entirely on the borrower’s ability to pay.

Before buying either, ask what you are owed if things go badly.

Who gets paid first if a company fails

If a company goes bankrupt and its assets are sold off, its bondholders are paid first, then holders of preferred stock, and common stockholders share any remainder, which can be zero. Investor.gov, which the SEC (the US market regulator) runs for investors, sets out that order and adds that bondholders are paid only “if there are assets”.⁴

1. 1Bondholderslenders: first in line
2. 2Preferred stockholdersnext in line
3. 3Common stockholderswhatever is left, maybe nothing

The order follows from what each group bought. Lenders hold a contract for fixed payments, so their claim is settled before anyone else’s; owners keep whatever value remains once every debt is paid. When a retail chain collapses and sells its stores, the proceeds go to its lenders first, and its ordinary shareholders can end up with an empty claim.

For any single company, first and last in line can mean the difference between getting part of your money back and getting none. Spreading money across many issuers is the usual way to stop one failure from mattering much; the reasoning is in how spreading money across many holdings lowers risk.

Are bonds safer than stocks?

Bonds are safer against some risks and exposed to others. FINRA, the Financial Industry Regulatory Authority that polices US brokers, says bond prices tend to be less volatile than stocks and that US Treasury securities are generally deemed free of default risk. It also lists the dangers bondholders face, among them interest rate, inflation and credit risk: the chance an issuer fails to pay interest or principal. Bonds rated BB or below on Standard and Poor’s scale are not considered investment grade, and these high-yield bonds generally pay more because default is judged more likely.⁵

Government bonds are only as safe as the government behind them. Under Greece’s second bailout, ratified in 2012, private holders of Greek government bonds had to accept a cut of about half in their bonds’ face value, along with lower interest rates and longer maturities.⁶ A bond from a struggling borrower can lose a large part of its value, much as a share can.

Myth

Bonds are the safe half of investing and can't lose money.

Fact

Bonds can lose value when interest rates rise, when inflation outpaces their interest, or when the issuer defaults, as Greek bondholders found.

“Safer” needs two questions after it: safer against what, and over what period. Against a sudden fall in price, a high-quality bond has usually held up better than a share. Against a decade of rising prices, it has often done worse.

Can you lose money in bonds?

Yes, in three main ways: the issuer can default, you can sell before maturity after interest rates have risen, and inflation can eat into fixed payments. A bond held to maturity returns its face value plus interest, the SEC notes, but one sold early may be worth more or less than that.⁴

Rising rates hurt because a bond’s interest is fixed when it is issued. A 2013 SEC investor bulletin explains why bond prices fall when interest rates rise: new bonds pay the higher rate, so the price of an older bond paying a lower fixed rate tends to fall. The bulletin stresses that this applies to all fixed-rate bonds, Treasuries included.⁷

Inflation can do slower, deeper damage. In WiserHours’ calculation from the US return series maintained by Aswath Damodaran of NYU Stern, money in ten-year US Treasury bonds at the end of 1940 had lost more than half its buying power by the end of 1981, and got back to its 1940 level after inflation only in 1991. The calculation assumes interest was reinvested and ignores fees and taxes.⁸

If you might need the money before a bond matures, the price on the day you sell matters more than the face value printed on it. Matching a bond’s maturity to the date you need the money removes the price risk, though not the risk of default or of inflation.

Do stocks or bonds give better returns over the long term?

Over long periods, stocks have earned more than bonds in every country with an unbroken market history since 1900 in the UBS Yearbook, though not in every decade. Its three academic compilers (Elroy Dimson, Mike Staunton and Paul Marsh) found that equities beat every other asset class in each of the 21 countries with continuous investment histories; the bank UBS publishes the Yearbook without peer review.³

Shorter spans are less dependable. In WiserHours’ calculation from Damodaran’s 1928 to 2025 US figures, stocks beat ten-year Treasuries after inflation in all but one of the overlapping twenty-year periods, but in only about 85 percent of the ten-year periods.⁸ Neither record is a forecast: the SEC reminds investors that stock prices move down as well as up and that money put into stocks can be lost.¹

“Continuous histories” leaves out markets that were closed or wiped out, so the record flatters stocks, and most long datasets, including Damodaran’s, describe a single country’s experience. The price of the extra return has also been deep falls; how far and for how long US stock markets have dropped is set out in the history of bear markets and how long they lasted.

When stocks and bonds fall together

Stocks and high-quality bonds rarely fall hard in the same year, but it can happen. In 2022, in Damodaran’s US data, large US stocks in the S&P 500 index lost about 18 percent including dividends, and ten-year US Treasury bonds lost about 18 percent too, that bond’s worst calendar year in a series that starts in 1928. The same data show the ten-year Treasury yield more than doubling during 2022, the kind of rise in rates that pushes down the prices of existing bonds.⁸

The study

Moderate evidence

Ninety-eight years of US stock and bond returns, 1928 to 2025

Large US stocks lost money in 26 of the 98 calendar years and ten-year Treasury bonds in 20. Both lost money in the same year only five times, and in four of those the bond lost about 5% or less. In 2008, when stocks lost over a third of their value, the Treasury bond gained about a fifth.⁸

In most bad years for stocks the bond held up, and 2022 is the clear exception in this record.

If bonds are meant to soften a fall in stocks, check how long they are. FINRA explains that a bond’s duration, stated in years, signals how sensitive its price is to a change in rates: the higher the number, the bigger the swing, so long-dated bonds are the likeliest to fall alongside stocks when rates jump.⁵

Why people hold both stocks and bonds

People hold both because bonds have usually softened falls in stocks while stocks supplied most of the long-run growth. According to the UBS Yearbook, stocks and bonds have each lost more than 70 percent after inflation at times since 1900, yet a mix of 60 percent stocks and 40 percent bonds never fell by more than half. The same Yearbook notes that correlations between stocks and bonds have risen, meaning the two now tend to move together more than they did.³

How much goes into each is usually decided by two things. The SEC describes the split as a personal decision, shaped by your time horizon, meaning how long you plan to invest, and your risk tolerance, meaning your ability and willingness to lose money for a chance of higher returns. It adds that online risk questionnaires may be biased towards the products of whoever runs the website.⁹ The table shows how the trade-off usually reads in common situations; it is general information, and the right mix for you depends on your whole financial picture.

Tax adds a country layer. In the US, as of 2026, interest on Treasury bonds is taxed federally but not by states or local governments.¹¹ In the UK, as of 2026, gains on government gilts are free of Capital Gains Tax.¹² Other countries treat bond interest and share gains in their own ways, so compare after-tax returns using your own tax authority’s rules.

When your own decision needs an adviser

A page of comparisons can explain the trade-offs, but your mix depends on income, debts, tax and goals that no table knows. Each licence check below is one a named regulator recommends; ranking them by urgency is the editors’ own suggestion.

• Now, before buying any investment someone is selling you: confirm the seller holds a licence on the public register of your own country’s financial regulator. In the US, for example, the SEC advises checking every financial professional’s background on Investor.gov.¹³ In the UK, the FCA’s register shows whether a firm is authorised.¹⁴
• Soon, if cash you will need in the next few years sits in shares, or you are near retirement and weighing a move into bonds: a regulated adviser can review income, debts and tax together; ask before you agree how they are paid, whether by a fee or by commission on what they sell.
• Once a year: check whether the dates you need money have moved, since that is what changes the right mix most.

The bottom line

Stocks pay you as an owner and bonds as a lender, and that one difference explains most of the rest: who is paid first, why stocks have earned more and swung further, and why bonds react to interest rates and inflation. Before choosing between them, write down when you will need each sum of money and set it against the situations in the table above.