Stocks, Bonds, Mutual Funds; What are the basic differences?

Bonds

Unlike stocks where you own a share of the company, bond purchases are loans that earn interest at an agreed upon rate and mature at a specific date, when you are paid back the loan face value.   Bonds are generally considered safer than stocks as they are required by law to be repaid prior to stock investors should there be a bankruptcy.  Bonds are rated by agencies such as Standard and Poor’s and Moody’s.  The ratings range from unrated, to B rated to a AAA rating at the top.  The interest offered usually reflects the bond’s rating with the riskier bonds paying higher rates.  Bonds generally mature anywhere from 1 year to 30 years.   While bonds are considered safer than stocks, they do have risk and their values are directly related to key interest rate movements.  Generally, as key interest rates rise, prices of bonds fall.  This is known as interest rate risk.

Stocks

Corporations issue stock to raise money and to operate their business. A Stock, also known as equity, is an investment that represents ownership of a share of the issuing company.  The owner is entitled to a proportional share of the corporation’s assets and earnings. Historically stocks have performed better than most other investments over the long term. Stocks are available in 2 basic types- common and preferred.  Generally common shareholders have voting rights while preferred stockholders do not.  On the other hand, preferred stockholders have a higher claim on assets and earnings than common holders. Should the corporation go into bankruptcy, preferred shareholders concerns would be addressed before common shareholders.

Mutual Funds

A mutual fund is an investment company that pools together money from many investors and invests it together.  An investor who buys shares in a mutual fund has ownership in proportion of the assets owned by the fund.

Mutual Funds offer a way to diversify your investment while focusing on a particular segment of the market.  There are a wide variety of mutual funds.  The major fund types are bond funds, stock funds, balance funds, and index funds. Within those major types there are a variety of holdings with a variety of investment goals.  There are mutual funds that focus on growth companies, income, small cap companies, energy, real estate, balanced funds (growth plus income) and many more.

Mutual Funds generally require a minimum investment.  Unlike stocks, whose prices fluctuate throughout the day, mutual funds are priced at the end of the trading day.

It is important for investors to know that Mutual Funds can have a variety of fees and charges associated with them.

 

So many choices, which investment is best for you?  A Sara-Bay Financial advisor can help you make those decisions.

 

The information in this article is a compilation pulled from a variety of sources.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

 

 

 

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