savings-investing

Stocks and bonds: The basics

Stocks and bonds are the two most common types of investments. So before you start investing, let’s review the basics on what they are and how they function.

Stocks

Stocks are basically a slice of ownership in a publicly traded company. The value or purchase price of that slice, or “share,” fluctuates with the value of the company. So if you own Apple stock, and Apple is doing well as a company, the value of your share in Apple will increase as the stock price rises. Sometimes you will see stock prices rise and fall based on external factors like domestic policies or international trade, but most often, the value of your share is based on company or CEO performance.

In terms of performance, stocks have historically earned the highest returns over time. But they have more short-term ups and downs in price than bonds and are considered a riskier investment than bonds. Because of this short-term volatility, people generally plan to hold stocks as a long-term investment .

Bonds

Bonds, on the other hand, are very similar to traditional individual loans. Just like individuals, companies and governments take out loans to invest in projects or to make large, essential purchases. Unlike individuals, companies and governments may take out these loans by asking the general public to lend them money in the form of a bond. Owning a bond is equivalent to owning a piece of a company or a government’s debt. In return, the company agrees to pay back the initial value of the bond plus interest, just as you might pay back interest on a car or home loan.

Bonds have historically earned lower returns, but those returns are guaranteed and bonds as a whole experience fewer ups and downs than stocks. Because of this, they’re considered a safer investment than stocks.

Which should you buy: stocks or bonds?

You always want to have a balanced portfolio but as you develop your investment strategy, you want to weigh your appetite for risk against the amount of time until you retire. Generally speaking, setting aside a greater allocation for riskier investments with a bigger upside is advisable when you’re younger, because if you lose big, you have time to make up your losses. But if as you’re nearing retirement, you want to shift to safer investments to safeguard the savings you’ve built.

 

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