Should I Buy Stocks or Bonds? What's an ETF?

Asset classes 101

Happy Monday, and thank you to everyone who shared and subscribed! We’ve built a little community of budding investors and couldn’t have done it without your support.

This week, we’ll take a look at some of the major investment options out there and outline how they’re different. We’ll also do a series of deep-dives into each asset class in the coming weeks (please comment with any questions!).

Stocks

We hear a lot about the stock market, but what’s a stock? A stock, also known as a share, is a tiny piece of a company available for you to purchase.

For example, Amazon has almost 500 million total shares “outstanding”. You might buy 1 single share, or you might buy 10,000, but no matter how small your holding you still become a partial owner of the company.

Buying stock in specific companies (as opposed to a bundle of stocks or a “fund” - more on that later) is generally viewed as a high risk-reward tradeoff. You’re putting your faith in that business to do well over the long-term, so your risk is concentrated.

On the upside, you get all the benefits if that company grows (Zoom, anyone?) with no other investments or products to dilute your gains. Many companies also pay you a small yearly “dividend” for each share you own as a reward for being a shareholder and to let you share in their profits.

Finally, the stock market is where buyers and sellers of stocks gather to trade shares - think Craiglist but for stocks instead of your IKEA desk. The average of how well (or poorly) all the stocks in the market do for the year is generally referred to as “market returns” or “market performance”.

Bonds

Bonds get less media coverage than stocks because bond prices are more of a credit score as opposed to a measure of the company’s growth… but they’re an equally viable investment option.

While stocks lets you own a tiny piece of a company, bonds are loans the company owes to you. Like with any loan, not only does the company have to repay its debt once the loan period ends, but it also pays interest on what it borrows.

Bonds are issued by companies (or governments) when they need $$ to fund a new project, or expand, or pay off old debt. Buying a bond gives you a steady income stream via interest payments + a generally high probability you’ll get your “loan” paid back at the end of the three/five/ten year bond period.

Bonds are generally viewed as a low risk-low reward investment. Riskier companies (WeWork R.I.P.) will pay you a higher interest rate to borrow money, and more boring companies will pay less, but bond prices don’t grow the way stock prices do (they don’t drop by half, either!).

Bond markets tend to be less liquid i.e. have less supply and demand than stock markets, but you can think of trading bonds in basically the same way as trading stocks.

Mutual Funds & Exchange Traded Funds (ETFs)

This section is worth paying attention to because it’s likely where most of us will start as we take our first steps into investing. Picking and choosing individual stocks and bonds can happen later, once you’re more comfortable.

So for starters, mutual funds and ETFs are both “baskets” of different stocks, bonds, or both. However, the key differences are A) how they’re managed and B) how you buy them.

Mutual funds are run by professional money managers and banks, and there are people putting in research and analysis to try to create a basket of stocks and bonds that will outperform aka beat the market’s average performance. These are more bespoke and more calibrated investments than an ETF, but also come with higher management fees and less control.

ETFs are also run by professionals (many of the same firms offer both mutual funds and ETFs) but they tend to be static baskets, without an army of people trying to outperform the market. The stocks in an ETF are chosen according to different goals: for example, to replicate the S&P500’s performance, or to invest in the tech industry, or clean energy companies… the list is endless. You can buy and sell them in exactly the same way as a stock. This ease of access is why the ETF market has exploded in recent years.

Regardless of which fund style you pick, funds are thought of as lower risk options than single stocks or bonds because they expose you to a bunch of different companies all in one neat bundle.

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So, to recap:

• Stocks let you own a piece of a company and grow with it

• Bonds are a loan you make to the company in return for interest

• Funds let you combine different stocks and bonds in the same investment

We haven’t even discussed currencies, or gold, or property… but we’ll get there, promise!

Next time we’ll go over how you can actually ~open~ an investment account, manage stuff like government retirement accounts and more.

Note, these posts are intended as an educational resource and to encourage participation in the stock market. None of our opinions should be taken as investment advice, please speak to a professional for that :)