What Is a Stock? A Beginner's Guide to Shares and Company Ownership
May 12, 2026
8 min read
What Is a Bond? A Beginner's Guide to Fixed Income
Stocks get most of the attention, but bonds are the other half of most long-term portfolios. Here's a plain-English explanation of what bonds are, how they work, and why investors use them alongside shares.
For educational purposes only. This article is not financial advice. Always consult a qualified financial professional before making investment decisions.
If you've spent any time reading about investing, you've probably seen stocks and bonds mentioned in the same breath. "A diversified portfolio of stocks and bonds." "Shifting from stocks to bonds as you get older." But while most people have a rough sense of what a stock is, bonds can feel hazier.
This article explains what bonds are, how they work, and why they show up in so many portfolios. As always, this is educational content only — not financial advice.
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What Is a Bond?
A bond is essentially a loan. When you buy a bond, you're lending money to the issuer — which might be a government, a local authority, or a company — for a fixed period of time. In return, the issuer agrees to pay you interest at regular intervals and to return your original amount at the end of the loan period.
The original amount you lend is called the principal or face value. The interest payments are called the coupon (a term from the old days when bonds were physical certificates with detachable coupons you'd send in to claim payment). The end date when the principal is returned is called the maturity date.
A simple example: you buy a bond with a face value of £1,000, a 4% annual coupon, and a ten-year maturity. Each year you receive £40 in interest. After ten years, you get your £1,000 back.
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Who Issues Bonds?
Governments are the biggest issuers. In the UK, government bonds are called gilts. In the US, they're called Treasuries. Most developed-country governments regularly issue bonds to fund spending.
Companies also issue bonds — this is called corporate debt. A business might issue bonds rather than borrow from a bank, or alongside bank borrowing, when it needs to raise large amounts. Corporate bonds generally pay higher interest than government bonds from stable countries, because companies carry more risk of defaulting on their repayments.
There are also bonds issued by local councils and municipalities, by supranational organisations like the World Bank, and by governments in emerging markets — each with different risk and yield profiles.
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How Bond Yields Work
The coupon tells you the fixed interest payment. The yield tells you the actual return you'd earn if you bought the bond at today's price.
Here's why the distinction matters: bonds can be bought and sold on the open market, and their prices fluctuate. If you buy a bond for less than its face value, your effective return is higher than the coupon rate. If you pay more than face value, your effective return is lower.
This creates an important relationship: bond prices and yields move in opposite directions.
When demand for bonds rises — say, investors want safety during a period of market uncertainty — bond prices go up and yields fall. When demand falls, prices drop and yields rise. When central banks raise interest rates, newly issued bonds offer higher coupons, making existing lower-coupon bonds less attractive. Their prices fall, pushing their yields up to match the new market rate.
This inverse relationship can seem counterintuitive at first. It helps to remember that the coupon payment is fixed — so if the price you pay for the bond changes, the effective percentage return changes with it.
---
Why Investors Use Bonds
Bonds serve a few different purposes in a portfolio:
Income — bonds pay regular, predictable interest. For investors who need a steady income stream — retirees, for example — this is valuable. Dividends from stocks can be cut; bond coupons are contractually fixed (unless the issuer defaults).
Stability — bonds, especially government bonds from stable countries, tend to be less volatile than shares. Their prices move, but usually by less and more slowly than equity markets.
Diversification — historically, bonds and stocks have sometimes moved in different directions during periods of stress. When equity markets fall sharply, investors sometimes move money into bonds, pushing bond prices up. This relationship isn't guaranteed and has behaved differently in different economic environments, but it's part of why a mix of the two is often used to manage overall portfolio volatility.
Capital preservation — for money that can't afford to be in a volatile asset — perhaps needed within a few years — bonds (particularly short-dated government bonds) have traditionally been seen as a more cautious option than equities.
---
The Risks of Bonds
Bonds are often described as "safer" than stocks, but they carry their own risks:
Credit risk — the risk that the issuer can't repay you. A government bond from a country with a strong economy carries very low credit risk. A bond from a company with shaky finances carries considerably more. Credit rating agencies (Moody's, S&P, Fitch) publish ratings that give a rough indication of how creditworthy an issuer is considered to be. "Investment grade" bonds are considered relatively low risk. "High yield" bonds (sometimes called junk bonds) carry higher risk of default and pay higher interest rates to compensate.
Interest rate risk — if interest rates rise after you've bought a bond, the market value of your bond falls, because newer bonds with higher coupons become more attractive. The longer the time to maturity, the more sensitive the bond is to interest rate changes. If you hold the bond to maturity, you still get your principal back — but if you need to sell before then, you might get less than you paid.
Inflation risk — a fixed coupon is worth less in real terms when inflation rises. If your bond pays 3% and inflation runs at 5%, your real return is negative. This is why high inflation periods tend to be difficult for bond holders.
Currency risk — if you hold bonds denominated in a foreign currency, movements in exchange rates affect your returns in your home currency, independently of how the bond itself performs.
---
Government Bonds vs. Corporate Bonds: The Trade-Off
Government bonds from countries like the UK, US, Germany, or Japan are considered among the lowest-risk investments available. The chance of a major developed-economy government defaulting on debt is very low. Because the risk is low, the yield is lower too.
Corporate bonds pay more because there's a higher chance the issuer might run into difficulties. Investment-grade corporate bonds from large, well-established companies sit somewhere between government bonds and high-yield debt on the risk spectrum.
High-yield corporate bonds offer significantly higher coupons but carry meaningfully higher default risk. Some investors include a small allocation for the income; others avoid them entirely. They tend to behave more like equities than like government bonds in a downturn, which limits their diversification benefit.
---
Individual Bonds vs. Bond Funds
Most private investors access bonds through funds or ETFs rather than buying individual bonds directly.
Buying individual bonds requires relatively large minimum investments, and holding a spread of individual bonds to manage credit risk would require significant capital. Bond funds and bond ETFs do this for you — they hold many bonds across different issuers and maturities, collecting coupons and distributing income to fund holders.
Bond ETFs trade on exchanges like shares, with prices that move throughout the day. They're generally low-cost and straightforward to buy and sell. A bond ETF will have a mix of maturities — "short-duration" funds hold bonds maturing soon and are less sensitive to interest rate changes; "long-duration" funds hold longer-dated bonds and fluctuate more when rates move.
The trade-off with bond funds versus holding individual bonds to maturity: with an individual bond, you know exactly what you'll get back at the end (assuming no default). With a bond fund, the portfolio is constantly rolling — bonds mature and are replaced — so there's no fixed maturity date, and the fund's value will fluctuate with market conditions.
---
How Bonds Show Up in a Portfolio Tracker
When you hold bond funds or bond ETFs alongside equity holdings, a portfolio tracker can show you how much of your overall portfolio is in fixed income versus equities. This allocation is often the key variable in thinking about your overall risk level.
Bond prices move differently to equity prices, and they're priced differently too — so the gain/loss figures for a bond fund reflect both the price movements of the underlying bonds and any income distributed by the fund.
FolioTrack tracks your bond ETFs and funds the same way it tracks equity holdings — showing your purchase price, current value, gain or loss, and how much of your portfolio they represent. If you're managing an allocation — say, 70% equities and 30% bonds — seeing the current split clearly is the starting point for knowing whether your portfolio has drifted and whether it still reflects your intentions.
---
A Few Things Worth Remembering
"Safe" is relative. Government bonds from stable economies are lower risk than equities, but they're not risk-free. Prices do move. Inflation can erode real returns. And a bond in a foreign currency adds exchange rate risk.
Duration matters. A short-dated bond fund behaves very differently from a long-dated one, particularly when interest rates are moving. Understanding roughly what your bond fund holds is worth knowing.
Bonds and stocks don't always move in opposite directions. The historical inverse relationship between stocks and bonds has broken down in certain market environments — particularly during periods of high inflation, when both can fall simultaneously. Diversification across bonds and stocks reduces some risks but doesn't eliminate all of them.
The right bond allocation depends on your situation. How much fixed income you hold — and what type — depends on your time horizon, income needs, risk tolerance, and tax position. There's no universal answer. A financial adviser can help you think through what proportion of bonds, if any, makes sense for your circumstances.
Nothing in this article is financial advice.
---
The Short Version
A bond is a loan you make to a government or company in exchange for regular interest payments and the return of your money at a fixed future date. Bond prices and yields move in opposite directions. Investors use bonds alongside stocks for income, stability, and diversification — though bonds carry their own risks, including credit risk, interest rate risk, and inflation risk. Most private investors access bonds through low-cost bond ETFs or funds rather than individual bonds, and tracking your bond allocation alongside your equities gives you a clearer picture of your portfolio's overall risk profile.
This article explains what bonds are, how they work, and why they show up in so many portfolios. As always, this is educational content only — not financial advice.
---
What Is a Bond?
A bond is essentially a loan. When you buy a bond, you're lending money to the issuer — which might be a government, a local authority, or a company — for a fixed period of time. In return, the issuer agrees to pay you interest at regular intervals and to return your original amount at the end of the loan period.
The original amount you lend is called the principal or face value. The interest payments are called the coupon (a term from the old days when bonds were physical certificates with detachable coupons you'd send in to claim payment). The end date when the principal is returned is called the maturity date.
A simple example: you buy a bond with a face value of £1,000, a 4% annual coupon, and a ten-year maturity. Each year you receive £40 in interest. After ten years, you get your £1,000 back.
---
Who Issues Bonds?
Governments are the biggest issuers. In the UK, government bonds are called gilts. In the US, they're called Treasuries. Most developed-country governments regularly issue bonds to fund spending.
Companies also issue bonds — this is called corporate debt. A business might issue bonds rather than borrow from a bank, or alongside bank borrowing, when it needs to raise large amounts. Corporate bonds generally pay higher interest than government bonds from stable countries, because companies carry more risk of defaulting on their repayments.
There are also bonds issued by local councils and municipalities, by supranational organisations like the World Bank, and by governments in emerging markets — each with different risk and yield profiles.
---
How Bond Yields Work
The coupon tells you the fixed interest payment. The yield tells you the actual return you'd earn if you bought the bond at today's price.
Here's why the distinction matters: bonds can be bought and sold on the open market, and their prices fluctuate. If you buy a bond for less than its face value, your effective return is higher than the coupon rate. If you pay more than face value, your effective return is lower.
This creates an important relationship: bond prices and yields move in opposite directions.
When demand for bonds rises — say, investors want safety during a period of market uncertainty — bond prices go up and yields fall. When demand falls, prices drop and yields rise. When central banks raise interest rates, newly issued bonds offer higher coupons, making existing lower-coupon bonds less attractive. Their prices fall, pushing their yields up to match the new market rate.
This inverse relationship can seem counterintuitive at first. It helps to remember that the coupon payment is fixed — so if the price you pay for the bond changes, the effective percentage return changes with it.
---
Why Investors Use Bonds
Bonds serve a few different purposes in a portfolio:
Income — bonds pay regular, predictable interest. For investors who need a steady income stream — retirees, for example — this is valuable. Dividends from stocks can be cut; bond coupons are contractually fixed (unless the issuer defaults).
Stability — bonds, especially government bonds from stable countries, tend to be less volatile than shares. Their prices move, but usually by less and more slowly than equity markets.
Diversification — historically, bonds and stocks have sometimes moved in different directions during periods of stress. When equity markets fall sharply, investors sometimes move money into bonds, pushing bond prices up. This relationship isn't guaranteed and has behaved differently in different economic environments, but it's part of why a mix of the two is often used to manage overall portfolio volatility.
Capital preservation — for money that can't afford to be in a volatile asset — perhaps needed within a few years — bonds (particularly short-dated government bonds) have traditionally been seen as a more cautious option than equities.
---
The Risks of Bonds
Bonds are often described as "safer" than stocks, but they carry their own risks:
Credit risk — the risk that the issuer can't repay you. A government bond from a country with a strong economy carries very low credit risk. A bond from a company with shaky finances carries considerably more. Credit rating agencies (Moody's, S&P, Fitch) publish ratings that give a rough indication of how creditworthy an issuer is considered to be. "Investment grade" bonds are considered relatively low risk. "High yield" bonds (sometimes called junk bonds) carry higher risk of default and pay higher interest rates to compensate.
Interest rate risk — if interest rates rise after you've bought a bond, the market value of your bond falls, because newer bonds with higher coupons become more attractive. The longer the time to maturity, the more sensitive the bond is to interest rate changes. If you hold the bond to maturity, you still get your principal back — but if you need to sell before then, you might get less than you paid.
Inflation risk — a fixed coupon is worth less in real terms when inflation rises. If your bond pays 3% and inflation runs at 5%, your real return is negative. This is why high inflation periods tend to be difficult for bond holders.
Currency risk — if you hold bonds denominated in a foreign currency, movements in exchange rates affect your returns in your home currency, independently of how the bond itself performs.
---
Government Bonds vs. Corporate Bonds: The Trade-Off
Government bonds from countries like the UK, US, Germany, or Japan are considered among the lowest-risk investments available. The chance of a major developed-economy government defaulting on debt is very low. Because the risk is low, the yield is lower too.
Corporate bonds pay more because there's a higher chance the issuer might run into difficulties. Investment-grade corporate bonds from large, well-established companies sit somewhere between government bonds and high-yield debt on the risk spectrum.
High-yield corporate bonds offer significantly higher coupons but carry meaningfully higher default risk. Some investors include a small allocation for the income; others avoid them entirely. They tend to behave more like equities than like government bonds in a downturn, which limits their diversification benefit.
---
Individual Bonds vs. Bond Funds
Most private investors access bonds through funds or ETFs rather than buying individual bonds directly.
Buying individual bonds requires relatively large minimum investments, and holding a spread of individual bonds to manage credit risk would require significant capital. Bond funds and bond ETFs do this for you — they hold many bonds across different issuers and maturities, collecting coupons and distributing income to fund holders.
Bond ETFs trade on exchanges like shares, with prices that move throughout the day. They're generally low-cost and straightforward to buy and sell. A bond ETF will have a mix of maturities — "short-duration" funds hold bonds maturing soon and are less sensitive to interest rate changes; "long-duration" funds hold longer-dated bonds and fluctuate more when rates move.
The trade-off with bond funds versus holding individual bonds to maturity: with an individual bond, you know exactly what you'll get back at the end (assuming no default). With a bond fund, the portfolio is constantly rolling — bonds mature and are replaced — so there's no fixed maturity date, and the fund's value will fluctuate with market conditions.
---
How Bonds Show Up in a Portfolio Tracker
When you hold bond funds or bond ETFs alongside equity holdings, a portfolio tracker can show you how much of your overall portfolio is in fixed income versus equities. This allocation is often the key variable in thinking about your overall risk level.
Bond prices move differently to equity prices, and they're priced differently too — so the gain/loss figures for a bond fund reflect both the price movements of the underlying bonds and any income distributed by the fund.
FolioTrack tracks your bond ETFs and funds the same way it tracks equity holdings — showing your purchase price, current value, gain or loss, and how much of your portfolio they represent. If you're managing an allocation — say, 70% equities and 30% bonds — seeing the current split clearly is the starting point for knowing whether your portfolio has drifted and whether it still reflects your intentions.
---
A Few Things Worth Remembering
"Safe" is relative. Government bonds from stable economies are lower risk than equities, but they're not risk-free. Prices do move. Inflation can erode real returns. And a bond in a foreign currency adds exchange rate risk.
Duration matters. A short-dated bond fund behaves very differently from a long-dated one, particularly when interest rates are moving. Understanding roughly what your bond fund holds is worth knowing.
Bonds and stocks don't always move in opposite directions. The historical inverse relationship between stocks and bonds has broken down in certain market environments — particularly during periods of high inflation, when both can fall simultaneously. Diversification across bonds and stocks reduces some risks but doesn't eliminate all of them.
The right bond allocation depends on your situation. How much fixed income you hold — and what type — depends on your time horizon, income needs, risk tolerance, and tax position. There's no universal answer. A financial adviser can help you think through what proportion of bonds, if any, makes sense for your circumstances.
Nothing in this article is financial advice.
---
The Short Version
A bond is a loan you make to a government or company in exchange for regular interest payments and the return of your money at a fixed future date. Bond prices and yields move in opposite directions. Investors use bonds alongside stocks for income, stability, and diversification — though bonds carry their own risks, including credit risk, interest rate risk, and inflation risk. Most private investors access bonds through low-cost bond ETFs or funds rather than individual bonds, and tracking your bond allocation alongside your equities gives you a clearer picture of your portfolio's overall risk profile.
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