Types of Investments
I have been extremely confused with these terms being used in the domain of Financial Investments. I did my research and finally I came up with these simple definitions of these three jargons.
Bonds
They are also known as’fixed-income’ securities. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out. The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed or’risk-free’. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other investments.
Stocks/Equities/Shares
When you invest your money in stocks, you become a part owner of a business. While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren’t guaranteed anything. Stocks make you any money by increasing in value and going up in price, which might or might not happen. Some stocks also pay a part of the company profit to its stock-holders, these profits are referred to as dividends, the money you get as dividend depend upon the number of stocks you are holding for that company. Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential, you must assume the risk of losing some or all of your investment.
Mutual Funds
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, to pay a professional company to select specific investments for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, and the list goes on. The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself.