Stocks, Bonds, and Funds
A stock is a small piece of ownership in a company. A bond is a loan you make to one. A fund bundles hundreds of either into a single purchase — three building blocks, and almost every portfolio is some mix of them.
Almost every investment you'll ever hold is built from three pieces. Learn what each one actually is, and a portfolio stops being a wall of unfamiliar tickers and starts being a mix you chose on purpose.
A stock is a small piece of ownership
Buying one share of stock makes you a tiny part-owner of that company. Its value rises and falls with the market's view of the company's future profits, and some companies pay part of their profit back to shareholders as a dividend. Own the stock, and you own a real, if small, stake in whether that business does well.
A bond is a loan you make to someone else
Buying a bond means lending money — to a government or a company — for a fixed period, in exchange for regular interest payments and the return of your original amount at the end. Bonds are generally less volatile than stocks and pay a lower average return in exchange, which is the trade most investors are making when they hold both.
A fund is hundreds of both in one purchase
A fund pools money from many investors and buys a large basket of stocks, bonds, or both in one purchase — an index fund tracking a market benchmark is the most common kind, and it's covered in full two chapters ahead. One share of a fund can represent hundreds or thousands of underlying companies, which is how most people get diversification without buying each piece individually.
Stock
Ownership in one company.
Higher potential return, higher volatility.
Bond
A loan to a government or company.
Lower potential return, generally steadier.
Fund
A basket of many stocks, bonds, or both.
Diversification in a single purchase.
Key takeaways
- A stock is part ownership of a company; its value moves with the market's view of that company's future.
- A bond is a loan to a government or company, paying regular interest for generally steadier, lower average returns than stocks.
- A fund bundles hundreds of stocks, bonds, or both into a single purchase, which is how most investors get diversification without buying each piece separately.
- Most real portfolios are a deliberate mix of all three, shifted over time as the money gets closer to being needed.