Two Basic Investment Types: Stocks vs. Bonds
If you want your money to grow, you'll need to invest.
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Transcript
So youâve started earning a little moneyâand maybe youâre wondering what to do with it. Saving is smart, but if you want that money to grow, youâll need to invest it.
Where to start? How about the same place the pros start: with the two traditional investment types: stocks and fixed income, or bonds.
Buying a stock means buying a small piece of a company. Reallyâwhen you own shares of stock, you own part of the business, which means you have a claim on a portion of all future earnings. If that company grows and becomes more valuable, your shares go up in value too. Thatâs called capital appreciation. Some companies also send out part of their profits to shareholders as dividends.
Of course ⊠thereâs risk. Stock prices can go up or down depending on how the company performsâor how investors think it might perform. Thatâs the trade-off for potential growth.
And then there are bonds and other fixed-income investments. With fixed-income, instead of owning part of a company, youâre lending your money out. A corporate bond is a loan to a company. A municipal bond is a loan to a city or state. Treasury bonds, notes, and bills are loans to the federal government. And a certificate of deposit (or CD) is basically a loan to a bank.
In return for your loan, youâll get interest paymentsâusually at a set rateâand when the bond or CD matures, you get your original investment back. Bonds and other fixed-income investments tend to be more stable than stocks, but theyâve historically offered lower returns. And thereâs still risk, especially if the borrower canât pay you back (a situation called default).
Thatâs why investors rarely go all-in on just one thing. Diversification means spreading your money across different investmentsâstocks, bonds, and beyond. That helps balance out the ups and downs of the market to help manage your risk.
Investing might seem intimidating, but learning the basicsâand staying tuned to Britannica Moneyâcan put you on the right track ⊠and keep you moving toward your financial goals.
Where to start? How about the same place the pros start: with the two traditional investment types: stocks and fixed income, or bonds.
Buying a stock means buying a small piece of a company. Reallyâwhen you own shares of stock, you own part of the business, which means you have a claim on a portion of all future earnings. If that company grows and becomes more valuable, your shares go up in value too. Thatâs called capital appreciation. Some companies also send out part of their profits to shareholders as dividends.
Of course ⊠thereâs risk. Stock prices can go up or down depending on how the company performsâor how investors think it might perform. Thatâs the trade-off for potential growth.
And then there are bonds and other fixed-income investments. With fixed-income, instead of owning part of a company, youâre lending your money out. A corporate bond is a loan to a company. A municipal bond is a loan to a city or state. Treasury bonds, notes, and bills are loans to the federal government. And a certificate of deposit (or CD) is basically a loan to a bank.
In return for your loan, youâll get interest paymentsâusually at a set rateâand when the bond or CD matures, you get your original investment back. Bonds and other fixed-income investments tend to be more stable than stocks, but theyâve historically offered lower returns. And thereâs still risk, especially if the borrower canât pay you back (a situation called default).
Thatâs why investors rarely go all-in on just one thing. Diversification means spreading your money across different investmentsâstocks, bonds, and beyond. That helps balance out the ups and downs of the market to help manage your risk.
Investing might seem intimidating, but learning the basicsâand staying tuned to Britannica Moneyâcan put you on the right track ⊠and keep you moving toward your financial goals.