What Are Stocks And Bonds?

Are you wondering what are stocks and bonds. What is the difference between stocks and bond? And why does it matter?

These investments each have their own advantages and disadvantages. In this article I am going to tell you all about stocks and bonds, and what financial experts recommend.

What Are Stocks?

When you buy a stock you are buying a percentage of the company. The stock goes up and down based on how the company grows and is expected to grow in the future.

If you buy a stock on a company that doubles their sales then you should see an increase in the price of the stock that you bought. This is not always so simple, but that is the general idea.

In addition to benefiting from appreciation some stocks also pay dividends to their shareholders. This is basically a percentage of the company’s earnings which gets spread out to all the shareholders of the company. This provides a great way off making a somewhat steady income from your investment.

So how do I buy stocks? You can buy them in one of two ways. You can either open up a brokerage account and buy each stock individually (paying a small fee for each stock you buy) or you can put your money into a mutual fund which buys and sells stocks for you. This can be a great alternative if you do not like the idea of having to pick which stocks to enter yourself.

What Are Bonds

When a large company or government need to raise money they can issue a bond. This is similar to people going to the bank to take out a loan. The only difference is that when a bond is issued it goes to the free market where anyone can buy a share.

So when you buy a bond you are essentially giving the government or individual company a loan. The company agrees to pay interest payments on the loan and agrees to pay the full price of the bond when it matures.

So how do you buy bonds? Pretty much in the same way you would buy stocks. You can either open up a brokerage account of find a mutual fund that specializes in bonds.

Stocks Vs Bonds

Stocks vs bonds, which one is best for you? The difference between stocks and bonds is reflected in your return. Studies have shown that stocks tend to outperform bonds in the long term. But they are also riskier; you are dependent on the company growing to make money unlike bonds where you are simply being paid back with interest.

Some people don’t buy stocks for this reason and that is ok. Professionals recommend buying less stocks and more bonds as you get older.

It is generally recommended to keep an amount equal to your age in bonds. So if you are 20 keep 20% of your portfolio in bonds. If you are 50 keep 50% and so on. Of course that is just one of many ways to split it.

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