Understanding Stocks and Bonds

Of all the financial terms that get thrown around the most in media and popular culture, stocks and bonds have to be near the top of the list. But what are they? And more importantly, should you be investing in them?

Stocks

When you buy a stock, you’re essentially taking ownership of a certain percentage of the company you’ve invested in. A stockholder owns a share of the company, and while the bigger stockholders are the ones who actually get to make decisions on how the business is run, smaller stockholders still get to reap the benefits when the company does well.

You don’t have to work for or have any personal affiliation with a company to buy stock, and you can sell your stock or buy new stock (or perhaps a bigger share) whenever you want.

Stocks can be an incredibly lucrative investment if chosen well, but that’s often the Catch 22; how do you know which stocks will do well and how can make sure to buy in during a sweet spot? The short answer is – you can’t. You can guess and research and talk to as many financial advisors as you want, but the unfortunate truth is no one can perfectly predict the stock market. That’s why it’s important to carefully consider if the unpredictable and oftentimes volatile nature of the stock market is right for you.

When doing your research, make sure to understand what stocks make good investments. While it’s important to pick a company you like, you should also make sure it’s a smart move financially. You need to look at trends, products, revenue, profit, growth, insider trading, and management skills within the company before making a decision.

Bonds

A bond, simply put, is money you lend to a company for a certain amount of time, and in return you receive the same amount back plus a small pre-agreed upon surplus (usually a specific interest rate). It’s like making a purchase on a credit card, but flipped so that you’re the creditor. Bonds are one of the most secure investments a person can make because there is no uncertainty – the terms are agreed upon beforehand, and you are guaranteed to get your money back.

The system works because it gives companies the funds they need to keep building their business and increasing their value, and it means you get to put money away for a bit and know that when it’s returned to you, it’ll be worth even more than it was before.

For example, if you buy a bond worth $2000 at face value with an interest rate (or coupon) of 10% and a maturity of 10 years, it means you’ll get 10% of that $2000 dollars every year (so $200 a year – usually paid out in two semi-annual installments) for the next ten years. Then, when the bond reaches its maturation date (the pre-agreed upon end date), you’re given back your original $2000 dollars.

Which one should I invest in?

Whether you choose to put your money in stocks or bonds (or both) depends entirely on what you’re hoping to gain from your investment, and more importantly, how much you’re willing to (potentially) lose. If you need security and very low risk, stocks are probably not the right answer. The stress you’ll feel over your investment likely won’t be worth the potential gains, especially over a long term period (especially if you’re the type to panic and immediately pull your funds when stocks dip rather than waiting it out a bit).

If you are willing to take a risk and do your research, though, stocks can be a great investment. Make sure you don’t put more money in than you can afford, invest in a company or industry you actually like and understand, and lower your expectations. Stocks are not a get rich quick scheme. Often, the markets will dip or grow slower than you’d hoped. The key is to keep an eye on your investment, stay as up to date as you can on the market, and get out as soon as you feel like it’s not worth the risk any longer.

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