Have you ever wondered what a stock, bond, or mutual fund are exactly? If so, then this is the post for you. These terms are thrown around daily on stations like CNBC. It’s just expected that the average person knows what they are and the differences between them. Well I have found that this is not always the case.
A stock is simply ownership in a corporation. Stockholders are known as equity holders. An investor that buys shares is part owner in a company and has the right to share in profits distributed by the company. The primary purpose for investing in a stock is capital appreciation. Stocks can also pay dividends that help add to their overall return.
A bond is a debt or obligation of a company. Bondholders do not have equity in a company and have no right to share in company profits. Bondholders receive interest income every 6 months and receive their original investment back at maturity. Investors in bonds do have a claim against company assets if a company goes out of business.
A mutual fund is an investment vehicle that pools money together from a group of investors. The two most popular types of funds are stock funds and bond funds. A stock mutual fund is simply a collection of stocks. Fund managers are responsible for buying and selling assets to generate a return for investors. Mutual funds are the largest class of investment for most investors.
Certificate of Deposits
You may only think of a CD as something that you put in your car to play music. But a CD is a lot more than that. A CD is a time deposit offered by banks, credit unions, and brokerages. CD investors lend money to the bank for a specified period of time and receive interest on their principal. CD’s are FDIC insured and have terms as small as 3 months and as long as 5 years.
A money market account is a FDIC insured account that pays higher interest to accountholders. A money market account typically requires a $1,000 investment to receive the higher rate. A money market fund is a mutual fund that invests in short term securities and seeks to maintain a stable $1.000 net asset value. Money market funds are not FDIC insured.
Well there is your primer on Personal Finance 101. Class dismissed!