How is a bond fundamentally different from a stock?

A bond is fundamentally different from a stock because a bond represents a loan made to an organization, whereas a stock signifies partial ownership in a company. When you purchase a bond, you are lending money to the issuer, which could be a corporation or a government entity, and in return, you are entitled to receive periodic interest payments (often referred to as coupons) and the return of the principal amount when the bond matures. This means that bondholders do not have ownership in the company; they are creditors.

On the other hand, when you buy stock, you are buying a share of the company, which entitles you to a claim on a portion of its assets and earnings. This ownership can potentially yield dividends (a share of the company's profits distributed to shareholders), but it also comes with greater exposure to the company's performance and market risks.

Understanding this distinction is crucial for investors as it influences their risk strategy and investment choices. Bonds are typically seen as safer investments compared to stocks, which can be subject to higher volatility. Therefore, the correct answer reflects the essence of how bonds and stocks operate within the financial market.