When I think about stocks and bonds, I think about guys in suits aggressively yelling. So this has made me hesitant to invest in stocks and bonds. But, these are important financial tools so it’s important to know what these are. I also knew that if I had these questions and associations with these things, y’all might as well so I wanted to provide a resource for you!
So let’s get into it! First up, what are stocks and bonds?
What are they?
Let’s start by just understanding what each of these things are.
Stocks
A stock represents an ownership in a particular company, and when you buy stocks you are buying parts of the ownership of a company. Think about it like a pie. The company is the whole pie and it is divided up into pieces, or the stocks. So, buying a stock is like taking a piece of the pie.
The goal of buying stocks is to make money. And that happens when whatever company you purchase the stock of is successful. That drives up the market value of the stock, and then you can sell your stock for a profit. Love profit.
One thing to consider with stocks as well as the potential upside is also the downside. Stocks’ value can also go down if the company does not perform or meet expectations, which will drive the price down and your investment will be worth less than what you bought it for.
Bonds
Bonds
A bond are like a loan from you to the company or government selling the bond. When you buy a bond, you are giving the company money in exchange for set interest payments. So, for whatever period the bond covers, you will receive payments and then at the end of the period, the company or government who you bought it from has to give you back your original investment amount.
Bonds do have some risk associated with them. The guaranteed payment is great and usually you know what you are getting into at the beginning. But, if the company or government you buy from goes under or runs out of money, the interest payments could stop and getting your original investment back could be difficult or not happen.
Pros and Cons of Each
Stocks
Pros:
Money – One reason why people love investing in stocks is that there is the possibility to get a great return on your investment. There is an opportunity with stocks to earn a profit quickly.
Options – There are stocks in a wide variety of different companies and there are lots of different markets as well. Stocks also have a large range of prices so you don’t need a ton of money to get into the market.
Cons:
Risk – Stocks are not guaranteed to increase in value, so there is going to be some risk associated with investing in this type of instrument. Risk will vary by company and time, so it’s important to do research before purchasing.
Dependent on Company – The performance of your shares depends almost entirely on the performance of the company you are investing in. As someone who likes to have control, this makes me a little nervous.
Bonds
Pros:
Stable – In general, bonds tend to be a more stable investment compared to stocks. Bonds backed by governments or stable companies provide a guaranteed income stream, so the overall risk is lower.
Consistent Money – Bonds will give you interest payments throughout their duration. This means that you will get money during that time which is immediate money in your pocket!
Cons:
Variety of Rates – Bonds can have a large variety of interest rates due to the fact that there are many different types. Government bonds are much more stable, and thus have a lower rate. But, company bonds can be riskier, so there is an opportunity to get a higher rate.
There are many different ways to invest your money, but the above should help you better understand what stocks and bonds are. Now, when you hear people using these terms you will have a better grasp of what they are and why they are used.
What other financial terms would you like me to cover next?
