Stocks, bonds and funds: owning, lending and pooling
Owning a share, lending through a bond and holding a fund are three different claims on the same economy. This lesson explains what each one is and who is paid first, with a calculator that pays the bondholders and shareholders of an invented company as its value changes. It then explains how mutual funds and ETFs are priced, and compares how Coca-Cola and PepsiCo finance themselves with debt and equity and what they paid in dividends in 2025.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- How securities markets work
By the end you will be able to:
- explain what a stock, a bond and a fund represent
- say who is paid first when a company does well and when it fails
- calculate the return to bondholders and shareholders for a given company value
- compare how mutual funds and ETFs are priced and traded, and work out a fund's NAV
- read a company's debt, equity and dividends from its published results
Owning, lending and pooling
There are three basic ways to put money to work in securities. You can own part of a company by buying its stock. You can lend to a company or a government by buying its bonds. Or you can pool your money with other investors in a fund that holds a collection of stocks, bonds or both. The first lesson in this module covered how those securities are sold and traded. This one covers what each one actually is, who gets paid first, and where the money comes from.
The difference between owning and lending is the most important idea in investing. A lender is promised a fixed amount and is paid first. An owner is promised nothing and receives whatever is left, which can be a lot or nothing. The lesson on bond pricing and yield shows how a bond is valued, and the lesson on the cost of equity shows what shareholders should expect to earn for bearing the risk. Here the aim is to see the structure.
Stocks: a share of ownership
The SEC's investor site describes stock as a security that gives stockholders a share of ownership in a company. A shareholder can make money in two ways. The share price can rise, which the site calls capital appreciation, and the company can pay dividends, which the SEC glossary defines as a portion of a company's profit paid to shareholders. Prices also move down, and the site is explicit that you can lose money you invest in stocks.
There are two main classes. Common stock entitles owners to vote at shareholder meetings and to receive dividends, and common holders are paid last if the company fails. Preferred stock usually carries no voting rights, but its holders are paid dividends before common holders and rank ahead of them if the company is liquidated. A dividend is not a promise. Companies that pay one usually do so on a regular schedule, but the board decides, and it can change or stop it.
Bonds: a loan with a schedule
The SEC describes a bond as a debt obligation, like an IOU: a buyer of a corporate bond lends money to the company. The company makes a legal commitment to pay interest on the principal. The interest payments are called coupon payments and the interest rate is the coupon rate. The date on which the company has to pay back the principal is the maturity. The key risk to a bondholder, the SEC notes, is that the company may fail to make timely payments of interest or principal, and in a bankruptcy bond investors have priority over shareholders in claims on the company's assets.
So a bond has a capped upside. If everything goes well the holder receives the interest and the principal, and no more. If things go badly the holder may receive less. A stock has no cap on the upside, and its downside stops at zero.
Who is paid first? Harbor Foods
Harbor Foods is an invented company, financed with $600 million of one-year bonds and 100 million shares that investors bought for $400 million in total, which is $4.00 a share. At the start it is worth $1,000 million. A year later, set what the firm is worth and the bond interest rate. The left page pays the bondholders what they are owed, or whatever the firm can cover. The right page gives shareholders what remains. At the starting settings the firm is worth $1,100 million and the bonds pay 6.0%.
The firm can pay its bonds in full: $636 million, a return of 6.00%, no matter how much more the firm is worth. Shareholders keep the remaining $464 million, $4.64 a share, a return of 16.00%, and every extra dollar of firm value is theirs.
Four experiments. First, at the starting settings the bonds are owed $636 million and paid in full, a return of 6.00%, and the shareholders keep $464 million, a return of 16.00%. Second, move the firm's worth up to $1,400 million. The bondholders still earn exactly 6.00%, and the shareholders' return climbs to 91.00%. The lender's gain is capped, and the owner's is not. Third, move it down to $900 million. The bonds are still paid in full, but the shareholders now lose 34.00% of what they put in, because they only get what is left. Fourth, go below $636 million. The bondholders are now short, and the shareholders receive nothing at all. The shareholders' loss is capped at the whole $400 million, while the bondholders' loss grows as the firm's worth falls.
The same firm, five possible outcomes, at a 6.0% interest rate:
| Firm worth after a year, $ million | 500 | 636 | 800 | 1,100 | 1,400 |
|---|---|---|---|---|---|
| Bondholders receive, $ million | 500 | 636 | 636 | 636 | 636 |
| Bondholder return | −16.67% | 6.00% | 6.00% | 6.00% | 6.00% |
| Shareholders receive, $ million | 0 | 0 | 164 | 464 | 764 |
| Per share, $ | 0.00 | 0.00 | 1.64 | 4.64 | 7.64 |
| Shareholder return | −100.00% | −100.00% | −59.00% | 16.00% | 91.00% |
The bondholders' return is almost flat across good outcomes and falls sharply only in bad ones, while the shareholders' return swings widely in both directions. That swing is why shareholders usually expect a higher return over the long run for taking it, the idea covered in the lesson on the cost of equity.
Funds: a pool of securities
Most households do not buy individual stocks and bonds one at a time. They buy a share of a fund. The SEC describes a mutual fund as an SEC-registered open-end investment company that pools money from many investors, and says each mutual fund share represents an investor's proportionate ownership of the fund's portfolio. Exchange-traded funds, or ETFs, are also SEC-registered investment companies that let investors pool their money, but they trade differently.
A fund's net asset value, or NAV, is the per-share value of its assets minus its liabilities. A fund with $500 million of assets, $2 million of liabilities and 49.8 million shares has a NAV of (500 − 2) ÷ 49.8 = $10.00 a share.
| How the two kinds of fund compare | Mutual fund | Exchange-traded fund (ETF) |
|---|---|---|
| What a share represents | A proportionate share of the fund's portfolio | An interest in the pool of investments |
| When it is priced | Once each business day | Throughout the day on exchanges |
| Price you receive | The NAV calculated after your order | The market price, which may differ from NAV |
| Who you deal with | The fund itself | A broker, through an exchange |
The practical point is price. A mutual fund trades at the NAV calculated after the order is placed. An ETF has a market price set by trading, which the SEC says may or may not be the same as the NAV, and an ETF share trades at a premium when its market price is higher than the value of its underlying holdings. The next lessons look at how a fund's holdings behave together, and later ones at what funds cost.
Coca-Cola and PepsiCo: owners and lenders in real accounts
Two of the world's largest beverage and snack companies show how a mature company is financed by both lenders and owners. The table uses figures from Coca-Cola's full-year 2025 release and PepsiCo's fourth-quarter 2025 release. Debt is the sum of short-term debt, current maturities and long-term debt as each release reports them. The two companies label their interest lines differently, so the table shows them but the text does not compare them as a ratio.
| Full year 2025, $ million | Coca-Cola | PepsiCo |
|---|---|---|
| Total debt | 45,492 | 49,182 |
| Equity attributable to shareowners | 32,169 | 20,406 |
| Total assets | 104,816 | 107,399 |
| Debt as a share of total assets | 43.4% | 45.8% |
| Debt divided by equity | 1.41 times | 2.41 times |
| Interest line (as each company reports it) | 1,654 (interest expense) | 1,121 (net interest expense and other) |
| Dividends paid | 8,779 | 7,638 |
| Net income attributable to the company | 13,107 | 8,240 |
| Dividends as a share of net income | 67.0% | 92.7% |
| Net cash from operating activities | 7,408 | 12,087 |
| Dividends as a share of operating cash flow | 118.5% | 63.2% |
Coca-Cola owed 45.5 billion against shareowners' equity of 32.2 billion, a ratio of 1.41 times. PepsiCo owed 49.2 billion against 20.4 billion of equity, 2.41 times. Both therefore rely heavily on lenders as well as owners, and both paid their owners more in dividends than they paid in interest or related costs. The dividends were a choice and the interest was a duty. Dividends were 67.0% of net income at Coca-Cola and 92.7% at PepsiCo. Measured against operating cash flow, Coca-Cola's dividends were 118.5% and PepsiCo's 63.2%. A figure over 100% means the dividends were larger than the cash the operations produced in that year, so the difference came from other sources such as cash held or other cash flows. The releases do not suggest the dividend is at risk, and this lesson draws no conclusion on that.
What this lesson simplifies
- Harbor Foods is invented. A real firm has bonds of different maturities and rankings, preferred stock, and bank loans, and a bankruptcy takes time and costs money.
- One year, no costs. The model ignores bankruptcy costs and taxes, and it assumes the firm's worth is known and the assets can be sold at that value.
- Returns here are for one year. Real investors may hold for decades and reinvest income.
- Not all bonds are equal. Government bonds, secured bonds and bonds of weak issuers have very different risks.
- Funds differ widely. A fund is only as safe or risky as what it holds, and the table shows how funds are sold, not whether any fund is good.
- The company comparison is one year. Debt, equity and dividends move from year to year, and dividends and debt can be affected by one-off events.
Common mistakes
Thinking a bond is risk free
A bond is a promise, and a promise from a weak borrower can be broken. Government and company bonds differ widely.
Thinking a stock owes you a dividend
A dividend is the board's decision. It can be cut or stopped.
Judging a fund by its name
Read what it holds. Two funds with similar names can hold very different securities.
Ignoring the order of payment
In trouble, lenders come first and owners last. That is why the same firm can have safe-looking bonds and risky stock.
Treating an ETF's price as its NAV
The market price can differ from the value of the holdings, especially when trading is thin or markets are moving fast.
Try it yourself
1. A bond has a face value of $1,000 and a coupon rate of 5%, paid once a year, with five years to maturity. What does the holder receive in total if it is held to maturity and the issuer pays in full?
Show the working
The yearly coupon is 5% × 1,000 = $50. Over five years that is $250. At maturity the principal of $1,000 is repaid. Total = 250 + 1,000 = $1,250.
2. In Harbor Foods at a 6.0% rate, the firm is worth $800 million after a year. What do the shareholders receive per share, and what is their return?
Show the working
The bonds are owed 600 + 36 = $636 million and are paid in full. What is left is 800 − 636 = $164 million. Per share that is 164 ÷ 100 = $1.64. The return is 164 ÷ 400 − 1 = −59.00%.
3. Now the firm is worth only $500 million. What do the bondholders receive, and what is their return?
Show the working
The bondholders are paid before anyone else, but there is only $500 million of the $636 million owed. Their return is 500 ÷ 600 − 1 = −16.67%. The shareholders receive nothing.
4. A fund has $500 million of assets, $2 million of liabilities and 49.8 million shares. What is its NAV per share?
Show the working
Assets minus liabilities = 500 − 2 = $498 million. Divided by 49.8 million shares = $10.00.
5. PepsiCo paid $7,638 million in dividends and earned $8,240 million in net income attributable to PepsiCo. What share of net income was paid as dividends?
Show the working
7,638 ÷ 8,240 = 92.7%. Dividends are chosen by the board, so this share can change from year to year.
Where this is used
- An investor decides how much of a portfolio to put in stocks, which can grow without limit but can fall to zero, and how much in bonds.
- A lender studies a company's debt and equity to see how much protection sits beneath the bonds.
- A saver chooses between a mutual fund and an ETF by looking at how each is priced and traded.
- An analyst compares what two companies pay their owners and their lenders.
Key terms
- Stock
- A security that gives its holder a share of ownership in a company.
- Dividend
- A portion of a company's profit paid to shareholders.
- Common and preferred stock
- Common stock carries votes and is paid last. Preferred stock usually has no votes and is paid ahead of common stock.
- Bond
- A debt obligation: the holder lends money to the issuer.
- Coupon
- The interest paid on a bond, set as a rate on the principal.
- Maturity
- The date on which a bond's principal has to be repaid.
- Mutual fund
- A registered fund that pools money from many investors and sells and redeems shares at the NAV.
- ETF
- A registered fund whose shares trade on an exchange through the day.
- Net asset value
- A fund's assets minus its liabilities, per share.
Questions people ask
Which is better, stocks or bonds?
Neither, in general. They offer different trade-offs between payment priority, upside and risk, and what suits a person depends on goals and time.
Why would anyone buy a stock if bondholders are paid first?
Because shareholders keep all the gains above what the lenders are owed, and over time they may be paid more for bearing that risk. Nothing guarantees it.
Is a fund safer than a single stock?
A fund spreads money across many holdings, which reduces the effect of any single one. It is still exposed to what it holds. A later lesson explains diversification.
Does a company have to pay dividends?
No. Many do not, and those that do can change them. Interest on debt is different, since it is a legal commitment.
Sources and review
- US Securities and Exchange Commission, Investor.gov, Stocks and the glossary entry Dividend, for what owning stock means, how shareholders can make money, common and preferred stock, and the order of payment in a liquidation.
- US Securities and Exchange Commission, Investor.gov, Corporate bonds, for the definitions of a bond, coupon and maturity, the risk of late payment, and the priority of bondholders over shareholders in a bankruptcy.
- US Securities and Exchange Commission, Investor.gov, Mutual funds and exchange-traded funds: a guide for investors, for how mutual funds and ETFs pool money, how each is priced and traded, and the difference between market price and net asset value.
- The Coca-Cola Company, Fourth quarter and full year 2025 results (Form 8-K, Exhibit 99.1, 10 February 2026), for debt, equity attributable to shareowners, total assets, revenue, interest expense, net income, dividends and operating cash flow.
- PepsiCo, Inc., Fourth quarter and full year 2025 earnings release, for short-term and long-term debt obligations, common shareholders' equity, total assets, revenue, net interest expense and other, net income, dividends paid and operating cash flow.
How the numbers were checked: the payments to bondholders and shareholders, the returns and the fund value were recomputed in plain code, and the calculator, which runs separately, was compared with that code across a grid of firm values and interest rates. The Coca-Cola and PepsiCo figures come from the releases cited above, and every ratio was recomputed from them. Harbor Foods and the fund in the example are invented for teaching.