What’s the difference between stocks, bonds and mutual funds?
In: Economics
Stocks are issued by companies in forms of shares. This means you technically own a portion of the company.
Bonds are like loans that you can buy. You can buy them from the government, and they agree to pay you back later at a certain date (the original loan plus interest).
Mutual funds are investors throwing their money together in a pool to buy a variety of stocks or bonds. It’s run by a manager and that person decides what is bought inside the fund. Investing in mutual funds means you’re exposed to a more diversified risk than buying stock in a singular company.
Stocks are publicly traded shares of a company that people can buy and sell as they please. Their price fluctuates depending on buying and selling pressure.
Bonds are a collection of financial assets sold by the government or banks to raise money with the promise that the buyer will receive X amount back in X amount of years. Say you buy $100,000 worth of bonds, with a return rate of 2%, that expires in 10 years. That means you’ll receive 2k annually from the bonds, until 10 years are up, in which you’ll receive $100,000 back, netting you 20k. (The math changes depending on the type of bond and how the buyer/seller wants it arranged.)
Mutual funds are just a shared pool of investors money usually managed by a bank that buys stocks and bonds with the pooled money. The goal here is to minimize risk to the individual investor.
A lot of good definitions here. Here’s a more conceptual way to think about it.
When an established company wants large amounts of money for certain expenses, it has a couple of options. One is to borrow from a bank (loans). Another is to ask people if they want “in” on the business for a price (stocks). The final is when the company wants to borrow from a pool of investors, not a bank (bonds). In these scenarios, the guiding principle is that the company wants to expand.
Mutual funds are when a group of investors pool their money and hire somebody to invest for them. You’re basically just throwing your money in with the herd and the managers do the investing.
The stock market is only for large, well established companies. No mom and pops shops. Those companies form a market, and the companies are ranked, etc. When somebody wants to look at the top 500 companies as a group, they are likely talking the S&P 500… the top 500 companies whose values make up a very high percentage of the whole market.
Anyway, you can group things however you like into these “indexes.” ETFs are like mutual funds but they don’t hire a management team, they let a computer keep the ETF in balance based on those indexes. They buy and sell stocks, or whatever, to keep aligned with whichever index they’re based on. ETFs are cheaper as they’re passive (meaning no analysis is done) where mutual funds are more expensive. ETFs are stupid, too, in the way they buy and sell. Sometimes the fund pays a lot in taxes that an active fund wouldn’t.
Just a tip: In my cynical mind, stocks have become just another thing that a company markets and sells. Having everyone gaining access to the stock market means that the average purchasers of stock are less educated. Where in the old days, the key reason for a stocks value was based on fundamentals like cash flows, marketing data, etc. we have a situation where stocks are valued on public perception and excitement. The game has drastically changed.
Stock is a share of ownership in a private company. If it is a pubicly traded company you can buy and sell it as you want. The value goes up and/or down and/or up again throughout the day depending on a lot of factors. Some companies also pay dividends for owning stock, it is from money they earn that they share with the stockholders.
A bond is usually a government thing, sometimes issued by comoanies, usually for projects of various kinds. They usually have a set maturity date with a set amount of growth (i.e., you buy it for $1,000 and in 5 years the government will buy it back for $2,000). They *can* be traded but they aren’t going to vary in value as much as stocks. It’s generally more of a longterm commitment when you buy into it, sort of like you’re giving the government a loan to do something like build a new bridge and they’re going to pay you back with interest.
A mutual fund is a portfolio of investments (usually stocks or some other resources) that is managed by a broker. These grow or lose value with the companies they have invested in but since they are invested in multiple businesses the value may not grow as fast or as slow. You can get dividends from them too. There is usually a service fee with these that you may or may not see directly as they are managed by people.
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