The Basics of Investing: Understanding Stocks, Bonds, and Mutual Funds

Saving money is the ultimate goal when you get started in your career. You want to put money away for a rainy day, pay for a child’s tuition, and even save for retirement. Once you start to build savings, how can you multiply that money for even better gains?

Make smart investments to increase your savings. Learn about stocks, mutual funds, and bonds to research methods for investing. Which investments make sense for you? Or is it best to invest in various ways to maximize your results?

Stocks

Stock represents fractional ownership of equity in an organization available for purchase by the public. For example, when you choose to invest by purchasing stocks, you become a part-owner of the company, called a shareholder. Then, by selling shares to the public through public offerings, the company receives capital to invest back into the business, and you reap the benefits as the company increases in value.

Here are some reasons why it’s a good idea to buy and sell stocks:

The possibility of high returns if a company quickly increases in value
Emotional investment in the well-being of a company
Higher returns than money sitting in a bank

One disadvantage of investing in stocks is that you run the risk of losing money when the business performs poorly. Start by investing in stocks that will likely increase in value. For example, Amazon, Target, and Apple have performed incredibly well in the last decade. Then you can venture out into choosing stocks that you believe might offer higher returns. When planning for retirement, it is a good idea to stay diversified and not take a large gamble with your retirement savings.

There are two kinds of stocks – common stocks include voting rights and payouts depending on the company’s profits. Preferred stocks have a fixed agreed-upon payment regardless of how the company performs.

Each stock will have a different price, depending on the current supply and demand in the industry. You can buy a bundle of stocks that has consistently performed well called the S&P 500. Once you purchase a stock, you are not locked into that stock indefinitely. Instead, you can cash out when you have made some money and choose new stocks to put your money into.

Bonds

A bond is essentially a loan to a large entity, such as a big business, municipality, or government sector. The bond has a fixed payment schedule that includes interest payments. When you reach the payment deadline, you will gain back your initial investment plus all the money collected from interest payments during the loan period.

One investment strategy is to consider purchasing bonds when the stock market has been roaring for a long period of time and showing signs that it might be on its way to being overvalued. Bond prices typically move in the opposite direction of interest rates. When the stock market is strong, typically, interest rates are low. The central bank will likely increase rates if the economy gets too hot and inflation starts to creep up.

This increases the demand for bonds, and their prices tend to appreciate in value. Longer-term bonds tend to be more sensitive to interest rates than shorter-term bonds.

Conversely, it might be a good idea to lower your exposure to bonds when interest rates have risen and the central bank starts to indicate that they might enter a phase of lower interest rates to spur the economy.

Bonds offer a lower risk than stocks. Look for these advantages when investing in bonds:

Low-risk
Fixed income schedule
Predictability

A downside of bonds is the risk of the debtor defaulting on payments. Then you would be out of money altogether. That’s why it’s important to invest in bonds associated with reliable entities. You could also lose money on a bond due to inflation and falling interest rates. If you buy the bond at a high-interest rate and then interest rates plummet, you are out of the difference.

Choose reliable bonds for US Treasury, city infrastructure, and big businesses. When you believe the government entity or large corporation will not default on a loan, your investment is more secure.

Mutual Funds

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds can be managed by a professional investment manager who chooses to invest funds on behalf of the investors.

You have a few choices regarding mutual funds:

Actively-Managed Funds: This hands-off approach to mutual fund investments allows you to hire a single fund manager to make decisions on a diversified catalog of stocks and bonds.
Index Funds: This mutual fund follows the success of a particular stock or bond index, such as the S&P 500 index.
Sector Funds: Mutual funds that focus on a particular sector of business, such as medical or technology industries, are considered sector funds.

Choose the mutual fund that makes sense for you. For example, if you have a particular interest in a field of business, you may be able to maximize your chances for high rewards by choosing sector funds in an industry you understand.

Mutual funds can be beneficial to your investment portfolio for the following reasons:

A diversified portfolio for higher chances of increased returns
Leaning on professionals to create an investment portfolio
The potential for high returns without requiring effort or base knowledge from you

As with any investment, risks are involved. When you hire a financial advisor or portfolio manager to manage your investments, the service comes with fees. However, even with a diversified portfolio, there is always the risk of losing money. If the economy spirals, investments across all industries will result in a loss.

Popular mutual funds with a long track record of solid performance are a great way to start.

Conclusion

Invest in your future by making wise investment decisions. Whether you choose to buy and sell stocks, bonds, or mutual funds, you can multiply your assets by more than just interest from your savings account.

Investments garner high returns even if you choose low-risk styles like investing in solid businesses that have a steady track record of success. Once you become more familiar with investing, you can take bigger risks and potentially collect even greater rewards.

Whatever you do, it’s time to increase your cash and meet your financial goals sooner than you ever imagined. Relieve the stress of retirement by focusing on a steady income from your investments. Then you can enjoy your retirement days with the extra capital that you deserve.