March 28, 2015
What is a stock? What is a bond? How should you own them (individual vs. mutual fund)? Why should you own them?
What is a stock? What is a bond? How should you own them (individual vs. mutual fund)? Why should you own them?
A stock is a partial ownership of a company. If there are 100 shares of stock outstanding for a company and you own 1 share. Then you own 1% of that company and are entitled to 1% or the votes and 1% of the profits of the company. If a company is doing well a stock will pay higher dividends and capital gains, if the company is doing poorly it will pay less. A bond is a loan to a company or government. A bond is a promis to pay a set amount of money at the end of the loan along with interest. A bond does not pay any differently depending on how the company is doing, unless the company is unable to pay its debt and make payments on a bond. Companies normally get money from bonds and get a very small amount of their money from stocks. You should own these in a no load index mutual fund. That way it is less important how the peaces are doing as long as the index as a whole is doing well. If 1 company goes under in the index it is only 1 of thousands and does not make as much of a deal, if you own individual stocks and own only 20 or so, 1 company going under can devastate you. You should own these to get the benefits of investing and owning part of the world economy. Stocks will give the biggest returns over time but bonds will help balance out the big ups and downs of the economy. So own both in accordance to your investing goals.
Great job, Garrett. Let’s review.
(1) When you own stock (equity) you are part owner of a company.
(2) When you own bond (fixed income) you own debt that a company or government issues.
(3) Owning stock and bond mutual funds provides you wide diversification as you own thousands of individuals stocks and bonds rather than just a couple. This reduces your risk.
(4) Owning stock and bond index mutual funds will decrease your costs dramatically and probably increase your returns over time (it has in the past).
(5) Owning appreciating assets like stocks and bonds will help you grow your money beyond inflation over time (in any given year you can lose money). This will put you down the path toward achieving wealth over time. Onward!