Imagine your friend needs to borrow $10 from you. They promise to give it back in a year, plus an extra $1 as a thank-you. You agree, and they write it down on a piece of paper. That piece of paper is basically a bond.
A bond is a loan you give to someone — usually a company or the government. In return, they promise to pay you back your money plus a little extra (called interest) after a set amount of time.
How Is a Bond Different from a Stock?
When you buy a stock, you own a piece of a company. When you buy a bond, you’re lending money to a company (or the government). You don’t own any part of them — you’re just a lender.
Think of it this way:
- Stock = You’re a part-owner of the lemonade stand
- Bond = You loaned money to the lemonade stand and they owe you back with interest
Why Do People Buy Bonds?
Bonds are generally safer than stocks. The company or government promises to pay you back a specific amount on a specific date. With stocks, there’s no guarantee.
People buy bonds when they want:
- Steady, predictable income — You know exactly how much you’ll earn
- Less risk — Bonds don’t bounce around in value as much as stocks
- Balance — Many people mix stocks and bonds so their money isn’t all in one place
Can You Lose Money on Bonds?
It’s less common, but yes. If the company goes bankrupt, they might not be able to pay you back. Government bonds (especially U.S. Treasury bonds) are considered very safe because the government is unlikely to go broke.
The Bottom Line
A bond is an IOU. You lend money, they pay you back with interest. It’s slower and steadier than stocks — more like a turtle than a rabbit. But sometimes slow and steady wins the race.