What’s the difference between stocks, bonds and mutual funds?

Question

What’s the difference between stocks, bonds and mutual funds?

In: Economics

Answer 1

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.