What is the primary distinction between a bond and a stock?

The primary distinction between a bond and a stock lies in the nature of what each represents in terms of financial instruments. A bond represents a loan made by an investor to a borrower, which can be a company or government entity. When an investor purchases a bond, they are effectively lending money to the issuer in exchange for periodic interest payments and the return of the initial investment (the principal) when the bond matures. This relationship clearly illustrates that bonds are debt instruments.

In contrast, stocks represent ownership in a company. When an individual buys shares of stock, they become a part-owner of that company and may benefit from dividends and appreciation in the company’s value. Therefore, stocks are equity instruments.

The understanding of bonds as forms of loans rather than ownership stakes is crucial, particularly in characterizing the risk associated with each investment type. Bonds generally carry lower risk compared to stocks, reflecting their role as a fixed obligation, whereas stocks can fluctuate significantly in value based on company performance and market conditions. This fundamental difference is why option C rightly captures the essence of the distinction between a bond and a stock.