Stocks and Bonds, What?

So you have some money saved up, probably from disciplined budgeting, and perhaps it's in your bank account.  What do you do with it now?  You are earning a little bit of interest, but you really want to see your hard-earned money grow, have it reproduce more of itself for you and take a little bit of the responsibility for your financial stability.  What can you do with it?  There are actually a lot of options available to you.

I'm fairly certain almost everyone has heard of stocks and bonds, but probably many college students don't know what they are or how to utilize them.  Please read the disclaimer at the bottom of my website as nothing I say will constitute financial advice.  I will try to state mostly facts and observations as well as give my own opinion, but if anyone reading this blog is actually thinking about putting money into any of the places I will mention, please do your own research to make sure any investments you make are right for you.  For this post though, I will be mainly defining a lot of these asset classes.

First of all, what are stocks and bonds?  First, let's look at the question of equity versus debt (stocks are a form of equity and bonds, debt).  Equity is ownership in something.  When you buy a stock, you are becoming a partial owner of the company and purchasing ownership.  Debt, on the other hand, is similar to the loans we have talked about for credit cards and banks.  When you buy bonds, you are loaning money to the entity on the other side.  If you buy government bonds, you give the government money and get a bond (a certificate that says the government owes you some amount of money) in return.

What is the difference in how these assets earn you money?  With equity, the value of your ownership depends on the performance of the company.  If you take some time to follow the stock market, you will see that it fluctuates day to day.  You can earn money through two avenues: capital appreciation of the stock (you buy the stock at one price and sell it at a higher price) or dividends (similar to interest you earn on debt).  For debt, you earn interest either when you get your principle back at the end of the term or as a stream of payments up until the end of the term.  It is kind of similar to how you pay interest on your credit card balance if you don't pay it off in full, except when you buy a bond, you are the one getting paid as the lender.

Bonds and debt securities are considered safer securities than stocks and equity because you are guaranteed your money back (depending on how reputable the bond issuer is).  Stocks do not have to guarantee a dividend and the value of a company can drop pretty steeply with some bad news.  However, with greater risk often comes greater reward, which I will discuss more in depth in my next post.