Stocks, Bonds, and Mutual Funds Explained

September 28, 2020

Stocks, bonds, and mutual funds are terms that you will frequently hear in investment conversations. If you intend to make significant headway in investing, you must become acquainted with these terms. The intention of this article is to help you to have a basic understanding of these investment products.

 

Stocks

Stocks refer to investment in a particular company. When you purchase a company’s stocks, you become a part-owner of the operation. You will find that stocks are riskier than bonds, but the returns usually much more significant. 

The value of stocks fluctuates, which means that its value may or may not go below your initial investment. The usual aim in buying stocks is to resell them later at a higher price than you originally spent to acquire the stocks. you can also earn from stocks by receiving dividends. Dividends are a share of the company’s net profits. Bear in mind that not all stocks offer dividends.

 

Bonds

Fundamentally, bonds represent a loan to a company or government entity. There is usually a specified point at which you will be able to redeem bonds at par or face value. This is referred to as its maturity date. At this point, you will receive your initial loan amount plus interest.

While bonds are less risky than stocks, it is possible for the value of bonds to decrease causing you to lose money. Movements in interest rates and the quality of the credit can determine the value of a bond at its maturity date.

The commission to buy bonds is usually 2% and to sell it is another 2%. To avoid paying a commission when you are selling bonds, hold them till maturity. There is no commission to get your funds back when bonds get to their maturity date.

 

Mutual Funds

A pool of funds collected from different investors for the purpose of investing in products such as stocks, bonds, real estate, or money markets is referred to as a mutual fund. These funds are operated by expert money managers. These managers actively participate in trading and investments in an effort to produce capital gains for or income for the fund’s stakeholders. 

Mutual funds are governed by a legal document, known as a prospectus, that outlines the investment goals of the fund. Before you invest in a mutual fund, ensure that you read the prospectus.

 

Final Words

These three investment vehicles, if used properly, can help you to achieve financial freedom or to increase your net worth. The overview of each given in this article should stimulate you to go and learn more. Go ahead and acquire further knowledge on this subject so that you can revolutionize your financial position.

Rahul Iyer

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