What are stocks and bonds and what is the difference between the two?

I will compare stocks to a racing car; all powerful snazzy, attractive, dangerous, accident prone and bonds to the family car; nothing much to look at, slow, always takes you where you are going, always there for you.
 
Some basic traits of the two:

• People investing in stocks want to see a return on their money, bond holders want to make sure the return of their money.
• Stocks are about taking risk and bonds are about avoiding risk.
• Stocks offer unlimited upside potential, bonds offer limited downside potential.
• Stocks mean ownership and bonds denote loaning. So we can say one is an ownership investment and the other is a loan investment.

The difference between an ownership investment and a loan investment is not too hard to understand. The differences are obvious once you know what to look for.

An ownership investment does not have an ending date. (When you buy a stock it never becomes due, you have to sell it to get cash)

Loan investments almost always have a due date (e.g. your fixed deposits with the bank)

Ownership investments rarely promise a specific return. A stock price can go up 10 times or remain static for years.

Loan investments nearly always promise a fixed return. A six month deposit certificate promises 4% return.

 
Next major distinction is whether you will get your money back.

In ownership investment there might be no such guaranty. A stock’s price can go to zero.

The loan investments are usually backed by the guaranty of the bank or the government.

With the above distinctions in your mind try to figure out what you are invested in.

Few examples: your checking account or Government bonds: loan investment

stock or mutual fund: ownership investment
 
What should you invest in?

Having too much investment in one type can be bad for the investor. Loan investments are unable to keep pace with inflation, you might have your money safe but the purchasing power goes down. Too much risk avoidance will result in less return.

Similarly Ownership investments can leave you without a penny in your pocket. Idea is to keep a balance between the two. Neither is in a category of good or bad or one better than the other investment rather they serve different needs. Needs which can vary from one person to the other depending on ones investment time horizon and risk appetite. Stocks and bonds complement each other.

In case you are new to investing first check your risk appetite, future needs and time horizon of investments to decide where you should put your money. I would suggest that you read more about stocks, mutual funds and bonds in following articles.