For a new investor, all different finance terms can be confusing and daunting. Stocks, bonds, mutual funds, rates, dividends, coupons … the list goes on and on. Some new investors rely on banks and shareholders to know the details and invest their money blindly; They are generally wrong. Other new investors take their time to learn a little about which form of investment is best suited for their needs. Here you have a quick way on some basic investment issues: the differences between stocks, bonds and mutual funds.
When you buy a share, you buy part of the ownership (although a very, very small part) in a publicly-traded company. The shares make money if you buy them at a low price and sell them high, and you can also earn income when the company shares a portion of its profits to its owners/shareholders (called “dividends”).
Bonds, on the other hand, are like formalized loans that investors offer to commercial and government agencies. They do not offer ownership of any kind of the company but often offer regular interest payments (called “coupons”) and/or full repayment at the time of the term of the bond (loan).
Mutual funds are, in simple terms, collections of stocks, bonds and other investment securities, managed by a financial expert to maximize profit. These funds often contain stocks and bonds of different companies.
What is the safest investment?
There is no simple answer to know which option among stocks, bonds and mutual funds is the safest. In the hands of a smart fund manager, a diverse mutual fund is very secure, while having a bond until its maturity is generally safe as long as the issuer does not file bankruptcy.
What is the best investment?
Again, the best option between stocks, bonds and mutual funds depends on your strategy and overall investment objectives. Stocks may be the riskiest but offer the highest profits, while bonds are generally safer and more stable. The strength of a mutual fund depends entirely on the investment vision of the person who manages it!