Stocks and Bonds

Investing is a long and hard process and it is important for any good investor to know the fundamentals of what they are investing in. Knowing exactly what you are putting your money into is crucial, which is why this document will explain the differences between stocks and bonds, two common forms of investment. A bond is a debt security, in other words, the issuer owes the holder a debt and is obliged to repay the original investment, also known as the principal, as well as any interest that has accrued. A stock is money, also known as capital, that is raised by a corporation through the issuance and distribution of shares through financial markets. In other words, the holder “owns” a small portion of the company. The main difference between stocks and bonds is the ratio between risk and return. Bonds are less volatile than stocks, but they also have a lower potential gain. Also, the risk associated with bonds is the chance that the issuer will not pay the principal back while the risk associated with stocks is the chance that the company fails and the stock price drops to 0. In order to mitigate the risks associated with these investment options, there are mutual funds. Mutual funds are a collection of stocks and bonds that is managed for you by a director and overseen by a board. Mutual funds allow an investor to diversify their investments and also get professional money management. 

An important factor to consider when starting to invest is your time horizon. Investing in the short term allows for lower risk but also yields lower rewards, while investing in the long term is vice versa. Another factor to consider is whether you want to invest professionally with an advisor or do it yourself. Using an advisor can be beneficial because you get professional advice and there is also a smaller time commitment. Investing with an advisor is also less stressful as you are relying on a proven coach. However, by investing yourself, you can get lower fees, more transparency, and control over your own money. When investing by yourself, you must educate yourself on some common mistakes. First, avoid going all in on one investment or asset class. Instead, you should diversify your portfolio with different stocks, bonds, mutual funds, and other asset classes to avoid losing everything. Second, make sure you know the risks of investing in penny stocks. Penny stocks are extremely volatile and risky stocks that have low value. Even though you can buy more shares of penny stocks over blue chip stocks with the same amount of money, the value of one's investment depends only on the percentage gain or loss of the total investment. Although the profits in penny stocks can be extremely high, if the stock fails, you lose everything. Thus, the risk of penny stocks is usually not worth the reward. Third, beware of fake news and bad investment advice. When investing, it is important to use trusted sources and follow the facts instead of rumors. If anyone tries to give you stock tips, they are usually looking to profit off of you, so take their suggestions with a grain of salt. Finally, and most importantly, remember to never invest money that you do not have. Always make sure that you have cash reserves and are prepared to lose whatever money you put in.