Lesson 4: Types of Investments

There are two basic ways to invest: You can be an owner or a lender. The two most common types of investments are stocks and bonds. When you buy a company’s stock, you become an owner of that company, even if you only own a miniscule stake. When you buy a company’s bonds, you become a lender to that company.

Stocks

These are ownership stakes issued by companies. Stocks never expire, and they don’t pay an interest rate. That means when you buy a stock, you don’t know how much you’ll ultimately earn, and you’ll generally hold it as long as you want to. The price you pay when you buy a stock—and the price you would receive if you were to sell it—are determined by the stock market. Stock prices can bounce around a lot in the short term. But in the big picture, investing in stocks is a winning strategy: Over the long term, stocks have returned about 10% annually on average.

Bonds

These are debts issued by companies or governments. Unlike stocks, when you buy a bond, you know exactly how much you are likely to make since most bonds pay a fixed interest rate and mature on a certain date. Because of that relative certainty and because bond prices are more stable than stock prices, bonds are considered to be safer investments than stocks. (Sometimes companies or governments don’t repay their debts, but those occasions are the exceptions.) However, they also offer lower returns. Over the long term, bonds have returned about 5% annually on average.

Investing is powerful because it can grow your money faster than savings-type vehicles.

However, investing always comes with risk, and being a successful investor means understanding and managing risk. Generally, for longer-term goals, you should invest in riskier options, which typically return more. For shorter-term goals, take on less risk.

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