Stocks and bonds are two ways that you can start investing your money. When you’re starting out, investing can be intimidating. The thought of putting your hard earned money out there, not knowing what will happen, and (often as a teenager) not knowing how things really work, can leave you feeling uneasy. It’s important to have an understanding of the basics of stocks and bonds if you want to start investing.
What are Stocks?
You can think of stocks as little tiny pieces of a company. When you buy stock, you are actually buying a small piece of ownership of that company, which is often referred to as equity or share. A company will exchange these small pieces of ownership for cash, helping them fund their business. When an organization decides that they want their stock publicly traded, they first decide how many shares they are willing to sell to investors.
What are Bonds?
Bonds are a form of debt and can come from either companies, cities, or government entities. Companies commonly use bonds as an alternative to new loans to fund company operations and expansion. Bonds are issued in coupons, which have a set par value and a coupon rate (interest rate) that will be paid over a certain time frame in which the bond matures. So, at the end of the term of the bond, an investor will have the full value of the bond plus accumulated interest payments.
Similarities Between Stocks and Bonds
Stocks and bonds are both methods for an entity to acquire money to fund their operation or growth. Both also rely on investors to provide them with this capital, knowing that the expectation is that the investors will come out profitable. As an investor, it is important to be confident in the organizations you choose to invest in.
Basic Differences Between Stocks and Bonds
Stocks and bonds are both investment options, but they operate very differently. Understanding the differences between stocks and bonds can help you make educated investment decisions, and make you more money over time.
- Stock is equity within a company and part ownership. Bonds are a form of debt.
- Stock value depends entirely on the company’s performance, whereas bond values grow over time as they reach maturity.
- Bonds are less vulnerable to changes in the company or economy and most often operate on fixed rates.
- Individual stocks carry a much higher risk, and bonds can provide a great low-risk investment option.
- Stocks typically have a much greater return, especially long term.
Pros and Cons of Investing in the Stock Market
|Pros||Often higher yield||Less risky to invest in|
|Investing early in a fast growing or extremely successful company can be extremely profitable||Resistant to changes within the economy or company|
|Cons||Riskier investments||Often yield lower returns|
|Leaves the potential for an overall loss||Success of the company does not increase your earnings
Should I Invest in Stocks or Bonds?
We recommend investing in both stocks and bonds. It’s important to create a diversified investment portfolio. “Don’t put all of your eggs in one basket”! By having a diversified portfolio, you reduce your risk as an investor if the companies you invest in start performing poorly or worse, go bankrupt. When taking a look at some of the pros and cons of stocks vs bonds and their risk, it’s clear why you wouldn’t want to go all in on one or the other.