Stocks, Bonds, and Mutual Funds Explained
What do you know about investments? Hardly anything? Does financial news and any financial information in general just confuse you beyond a doubt? Fortunately even the most financially illiterate can learn the basics of investments.
When you are investing in stock, your goal is to buy stock at one price and sell it at a higher price on a later date for profit. Shares of stock are issued by public companies on a stock exchange in order to raise money for their business. These prices fluctuate on a daily basis.
When you own a share of stock, even just one, you own part of the company. If you own stock, you are referred to as a shareholder. You can vote in the company, but your vote is usually only good for choosing those on the board of directors who makes the big decisions, unless you own a large part of the company.
A stock is considered an equity security because you own part of the company. A bond is considered a debt security because you lend the company money, you don’t own any of it. You can buy bonds from the government, state, bank, or a corporation. If you buy a bond for $1,000 that matures in 10 years with an effective interest rate of 5% paid annually, every year you will receive $50 until the 10 years are up at which time they will pay you back the $1,000.
You can hold bonds to maturity or you can buy and sell them. Bonds bought from the government usually have little to no risk. Corporate and municipal bonds have a rating that will tell you how risky they are.
Bonds are rated by letters. For example, a AAA is the highest rating which means it has the lowest risk by those usually have the lowest return as well. They are rated also as BBB, CCC, etc. The lower they go, the riskier they are.
Mutual funds are a mix of stocks and/or bonds. They work by pooling together a bunch of peoples money and a fund manager invests the money in several different investments for you.
Mutual funds are beneficial because you are able to diversify your money, meaning you reduce your risk by investing in many different securities or investments. No-load mutual funds are popular because they don’t charge fees which puts more money back into your pocket.