This content was taken from our course: “The Step-by-step Guide to Your 401k Plan.”
Investing can seem pretty complicated. There are many different types of investments, and the following questions are common:
- What are stocks?
- What are bonds?
- What are mutual funds?
To put it simply, a mutual fund is a just bundle of individual stocks and or bonds. Let’s explain what those are.
What are stocks?
We’ll start with stocks. If you buy 1 “share” of flowers r us, you now own stock in that company and are a partial owner. Did you hear that? An owner of a company . . . you’re a big shot! Almost as important as the CEO, right?
The value, or price of your “share” of the company will go up and down depending on how well the company is doing. You know, selling tons of bouquets? That kind of thing.
Also, the company may pay out some of the profits they made to the owners of the company, and that means you! These payouts are called dividends. If you don’t want to be an owner anymore, you can sell your share of the company to someone else.
Stocks have historically had high increases in value over time, so you’ll likely want to have stock mutual funds in your portfolio for growth. Stocks can have pretty big ups and downs from year to year, so we recommend balancing this uncertainty with an investment that has more certainty… like bonds. Bonds are also called “fixed income.”
What are bonds?
When you buy a bond, you are loaning money for a set amount of time, in return for interest. It’s like you are a little bank, loaning your money to people in need. You can loan to the U.S. government, different companies, or even your city for a specific project. How kind of you! In return for your loan, they promise to pay you interest.
But you can’t just take your money back whenever you want. You’ll have to wait until the “maturity date”, or, just like a stock, you could sell your bond to someone else.
What are mutual funds?
Mutual funds, like we mentioned, bundle 100’s if not 1000’s of stocks and/or bonds together for you (like a burrito.) So when you buy shares of the fund, you are actually investing in the stocks and/or bonds owned by the fund . . . just very very small amounts of each. Different mutual funds have different strategies and invest in different types of stocks and bonds.
Here are a few examples. Some mutual funds invest only in US large cap stocks, which are the biggest companies in the US. Some invest in international companies. Some just in US government bonds. And some mutual funds have both stocks and bonds in them.
What are stocks? A stock allows you to become an owner of a company.
What are bonds? A bond is like a little loan you give in return for interest.
What are mutual funds? A mutual fund bundles certain stocks or bonds together for you to purchase.
The Step-by-step Guide to your 401k Plan
Should you enroll in your 401k plan? How much should you save? Which investments should you choose? Getting these answers wrong could cost you 100,000’s of dollars! Check out our course that will help you come up with a simple plan to reach retirement using your 401k plan.