In broad terms, when you buy stock you are buying into a company. You become one of its owners, with all the potential rewards and risks that ownership entails.

When you buy bonds or debentures, you are loaning a company money. You do not own any of the company. You are one of its creditors. While both bonds and debentures are loans, they are different types of loans. A bond is a secured loan and a debenture is an unsecured loan.

A bond and a debenture is each "basically an IOU," explains Jim Graham, Director of Investment Advisors for the Los Angeles office of Deloitte & Touche, the international consulting firm.

The reasons for buying stocks, bonds and debentures are also different.

You buy stocks to have "a long-term investment horizon, and to participate in the growth of a company. An owner of common stock is an equity owner in a company," he adds.

If the value of a company that you own stock in goes up, so does the value of your stock. If it goes down, your stock price does too.

Some companies also pay dividends to stockholders. The size of the dividend can also increase during good years. But the dividends can depend upon the type of stock you own, "preferred" or "common."

Graham points out that a company's board of directors votes on whether to pay dividends to those holding common stock, and on how large those dividends will be. But the preferred stock dividends are spelled out when you buy - or are given - the stock. "Preferred stock dividends are paid before common stock dividends are paid." So if there isn't enough cash to pay both the preferred and the common stockholders, the preferred get paid while the commoners don't.

In case a company goes belly up, preferred stockholders also get paid before common stockholders. But you can't just go out and buy it. Getting preferred stock usually requires some sort of involvement with the company.

Regardless of the type of stock you own, the value goes up as long as people "think" the value of your company is going up. But if the value of your company goes down - or if people think it is going down - so does the value of your stock.

This was the hard lesson learned recently by thousands of investors who owned stock in some of the Internet service companies that kept going up and up and up even though there were no actual corporate earnings or even a real product to justify their high prices. In fact, the value of some companies rose even though the companies were reporting quarterly losses. Finally, the values of many of those stocks started tumbling.

Some people won big and some people lost big. This is the lure - and the danger - of stocks.

After all, the biggest attraction of the stock market is the hope that you' ll connect with that "magic" stock that will keep producing dividends and going up in value forever.

There's a different mind set involved in buying bonds and debentures.

Graham says that the typical bond or debenture buyers aren't interested in the possibility of a big payoff. They want a guaranteed income.

That's what bonds do.

As Graham said earlier, a bond is an IOU - with interest. It pays that interest regularly, usually twice a year. At the end of the bond's life, which is usually referred to as its maturity date, you get your money back. Your profit is the interest you collected along the way.

Short-term bonds mature in a year, mid-term bonds mature within one to 10 years, and long-term bonds are any that mature after 10 or more years.

There are some exceptions.

"You buy U.S. savings bonds at a deep discount, at a price much lower than the face value of the bond," Graham explains, "and the interest accrues over a long period of time. If you hold it for its maturity you get the bond's full face value."

Some bonds are "callable," Graham says. This means that the company or government that issued them can "call" that bond back, pay you your interest to date and return your original investment. This is most likely to happen if interest rates are dropping.

Let's say you have a bond that pays 9 per cent, but the interest rate drops to 6 per cent. The bond issuer will call the bond back, give you your money back plus whatever interest it owes you, and then put new bonds on the market to borrow at the new cheaper rate.

What bonds lack in excitement and the potential for the big score they make up for with slow and pretty dependable interest payments. They are safer than stocks, so the payoff is usually less.

In some cases, especially with some government bonds, the interest you make on them is tax-free.

Bonds are also secured debt. The company is providing collateral for the debt. "A debenture is unsecured debt," Graham explains, "so if the company were to default or go into bankruptcy the bond holders would be paid off before the debenture holders."

Since there is more risk with a debenture, the interest rate is higher, in order to make you willing to take that extra risk.

The simple fact is that there is some risk associated with each type of investment. People both make and lose money on stocks, bonds and debentures. The biggest thing to remember that the one thing that stocks, bonds and debentures have in common is the fact that the greater the risk, the better the payoff. But only you can decide how much risk you're comfortable with.