What is a stock? What is a bond?

Hello!

Recently a client told me her husband liked me, but did not like to come meet with me because he didn’t understand what I was talking about. Ouch.

I’ve resolved not to assume people know what I’m talking about. Today, I define a few common investment terms.

Read on to learn more!

Best,

Michelle Morris, CFP®, EA
BRIO Financial Planning

 

When my son had braces, I dutifully drove him 127 times to the orthodontist’s office. At the end of almost every visit, the orthodontic assistant would summon me and tell me what they did.

There were wire changes, which had different colors or was it different gauges (both?) and this was all being fine-tuned based on tooth movement(?). She also talked about his palate, his bite and other various orthodontic “things”.

She usually told me he needed to do a better job brushing and flossing and to come back in 6 weeks.

I understood the last bit and spent the rest of the time thinking about what I would have for dinner.

Every profession has jargon, and mine is probably among the worst. Today I define some of the more common terms related to investing.

What is a stock?

A share of stock represents ownership in the company. Stocks are also called “equities”. When you own stock shares, you are a shareholder.

Shareholders have a claim on future earnings of the company. The earnings may be paid out as dividends to the shareholders. *

Nearly every investment portfolio should have some stocks – they have outperformed other asset classes over time. Key words here are “over time”.

What is a bond?

Simply put,a bond is an IOU. When you buy a bond, you are loaning a company, or a government, money. The issuer of the bond pays interest and when the bond matures gives you your original loan amount back.

So in short, stockholders are owners and bondholders are lenders.

So which stocks and bonds should you buy? Buy all of them! The best way to do that is with a mutual fund. A mutual fund is a basket of many stocks or many bonds. Some mutual funds have both!

For example, the Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. stock market. How many stocks are in that fund? 3,575. Three thousand five hundred seventy-five!

Do you like Apple? It’s in there (it’s the top holding). Like Amazon? It’s in there. Like Berkshire Hathaway? (aka Warren Buffett). It’s in there. Like CubeSmart? Never heard of it. It’s a self-storage company. It’s in there too.

* However, not all companies pay dividends. A growing company may choose to reinvest earnings back into the company for further growth. These are called “growth stocks.” Some companies don’t have earnings! (Yet).

Are there other investment terms that you are wondering about? Send me an email michelle@briofp.com and I’ll cover them in a future newsletter.

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