One of the most exciting things about investing is the sheer number of options you have to invest in. If you are new to investing, it can be a bit overwhelming at first, but once you understand all of the doors that are open to you, it can lead to a “kid in a candy store” type of feeling. Probably the two most traditional investments that most people have heard of are stocks and bonds. If you were to check the average portfolio of an average investor, you would likely find half a dozen stock investments, some mutual funds and some bonds. The great thing about stocks and bonds is that they work together to help balance out the amount of risk in a portfolio: stocks tend to be higher risk while bonds tend to be lower risk. The first thing that every new investor should learn is that your portfolio should have a balanced amount of risk to be considered healthy. Let’s take a look at why having both stocks and bonds together makes so much sense.
To the untrained listener, when you talk about investing, you are talking about stocks. Not only are stocks the main from of investment for millions of people, they are also the main ingredient in mutual funds and in many other forms of investing. To put it simply, when you own a share of a stock, you own a piece of a company; a company that you believe is going to grow, prosper and earn even higher profits then they earn now. It is a vote of confidence in that company. When you buy a share of a company, that company receives that cash and uses it to invest in the future. If things get better, your stock becomes more valuable and then you can choose to either sell it and turn a profit on your investment or you can hang on to it and hope that the value climbs higher so you can sell it at a later date and make even more money. Most stocks can be divided up into two major categories: high risk and low risk. It is important to note, however, that all stocks have risks, even “blue chip” stocks that are usually the safest to own. Over the years, some types of stocks have proven to carry a higher risk than others, such as airline stocks or technology company stocks, while energy stocks tend to be fairly stable. A “blue chip” stock is stock in a company that has been around for a very long time and is constantly turning a profit, such as Shell Oil or Microsoft. You could still theoretically lose money on a blue chip stock investment, but there is much less chance of Shell going out of business tomorrow compared to a new start up company that has recently gone public.
Bonds are a much lower risk type of investment that many people use as their very first investment. Perhaps you once owned municipal bonds or even war bonds. These types of bonds work the same way that commercial bonds do. A company needs to raise money so they sell bonds. You can buy these bonds and then, on a certain date in the future, you can cash them in and make a small profit. Even big time investors with huge portfolios invest in bonds because they are relatively safe compared to stocks, although there is always a risk when you invest. Some companies offer both stocks and bonds at the same time as a way to earn money for future investing.
