Investing in stocks and bonds, or a combination of both
Investing in Stocks – When an individual invests in stocks (also referred to as equity), they are purchasing a company’s stock and thus becoming a part owner of the company. As an owner they are entitled to receive profits from the company, if the company makes a profit. When a shareholder makes a profit, it is referred to as a return on investment or ROI. The profit paid to the shareholder is known as a dividend; if the company does not make a profit the shareholder does not receive a dividend. Therefore when an individual invests in stocks they are projecting the future profitability of the company.
Investing in Bonds – When an individual invests in bonds (also referred to as securities), they are lending their money to a foreign or domestic company or government. In return for lending your money, the company or government agrees to pay the investor back the amount loaned with interest. Bonds are safer than stocks and considered to be a very low risk or even risk free. Because bonds are safer, the return on investment or ROI is lower than a stock.
Investing in Stocks and Bonds – If an individual is interested in investing in stocks and bonds, then a mutual fund is created. The mutual fund is a collection of stocks and bonds and made up of large stocks, small stocks, bonds from companies, bonds from governments, stocks in certain industry type, stocks in certain countries, etc. When the investor participates in mutual fund they are pooling their money with several investors as a part of a group.
Overall investing in stock is more volatile than investing in bonds. When an investor purchases stock they are taking the risk that the company will perform well and they will be paid dividends. There is a higher risk of return on investing in stocks because of the higher risk. Bonds, on the other hand, are very low risk and therefore the return on investment is lower.
When investing in a mutual fund there is the advantage of investing money without taking the time or having the experience needed to make a sound investment. With a mutual fund the investment advisor, who has experience in the field of investing, should be able to take the investor’s money and chose the wisest investments that consists of a combination of investing in stocks and bonds that have a high rate of return – this is considered a diversification of investment. Actually, mutual funds are extremely popular with a large percentage of Americans choosing this investment type.
The type of investment the investor chooses to make, either investing in stocks or bonds, depends on many factors. It is strongly suggested that when contemplating your investment, that you discuss the options with an investment advisor. Factors to consider when choosing to invest include: finances, stage of life, long/short-term plans, and their comfort level of taking risks with their money. The investment advisor does just that – advises. The ultimate decision on how an investor wishes to invest their money is their own decision.