What distinguishes shares from bonds in investment terms?

The distinction between shares and bonds primarily lies in the nature of the investment they represent. Shares signify ownership in a company; when you purchase shares, you acquire a stake in the equity of that business, which may entitle you to dividends—payments made to shareholders from profits—but it is not guaranteed. The potential for participation in the company’s growth and decision-making through voting rights is also a characteristic of shares.

On the other hand, bonds represent debt; when you buy a bond, you are effectively lending money to the issuer (which could be a corporation or government entity) for a fixed period at a specified interest rate. Bondholders receive regular interest payments, known as coupon payments, and expect to get their initial investment back at maturity. This fundamental difference in the relationship between the investor and the issuing entity highlights why the correct answer is that shares represent equity ownership while bonds are loans to entities.

The other options provide misleading information about shares and bonds. While shares often do pay dividends, it is not always the case; some companies may choose to reinvest profits instead. Furthermore, shares do not have fixed returns; their value can fluctuate significantly based on market conditions, similar to bonds. Lastly, both shares and bonds can be traded on financial markets