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Stocks, Bonds or Mutual Funds?

Which is best for beginners?

Jan 11, 2011

Many young adults in their 20’s and 30’s are beginning to attain some personal wealth and may decide to invest a portion of it in a conservative fund. However, determining which type of investment vehicle to use can seem daunting to a novice investor, especially if they are investing small amounts ranging from a couple hundred dollars to a few thousand. Further, repeated stories about stock market volatility can be frightening to an individual who is unfamiliar with the territory. As a result, more young adults are investing in conservative accounts, such as stocks, bonds and mutual funds. But even these less-risky accounts come with their pros and cons. Before investing a portion of an individual’s wealth in one of these accounts, it’s important to understand how they function in order to determine which will yield the maximum benefit.

A stock is simply part ownership in a company. Companies offer stocks to the public as a way of raising capital and remaining profitable. Not all companies offer stock and are generally referred to as private companies. However, most public companies offer shares that can be purchased at extremely low or high prices, depending on investors’ perception of the company’s health and profitability. There are two different types of stocks: common and preferred. Preferred stockholders tend to have a greater claim to the company’s assets and are paid first when the company pays dividends to its investors. Additionally, preferred stock dividends are generally paid out at regular intervals, while common stock dividends are paid at the company’s discretion.

Bonds, in contrast, are investments that are often defined as loans. An individual who invests in a bond would essentially be the lender, and the entity he or she invests in would be considered the borrower. Bonds are set up for a specific amount of time, ranging anywhere from two years to 20 years. During this period, the investor will receive regular interest payments largely dependent on the type of bond purchased and how risky it is. For example, Treasury Notes and Treasury-Inflation Protected Securities are low risk, while high-yield bonds or “junk bonds,” carry a higher risk, and, if it performs well, a higher rate of return. Unlike stocks, bonds come in different shapes and sizes, meaning consumers should do their homework before determining which type of bond conforms to their financial goals.

Lastly, many Americans looking for low levels of risk often turn to mutual funds. A mutual fund is not a stock, but can be thought of as an assortment of different stocks. Individuals who invest in a mutual fund leave their money with a fund manager, who determines which mixture of stocks are most likely to perform well and yield the highest return. Some investors prefer mutual funds over investing in stocks, because investing in a variety of stocks adds more diversification to their portfolio, which helps protect them when the market is volatile. However, consumers should make sure they trust the fund manager’s judgment, since he or she will be the individual determining which stocks to pick.

To supplement investments, consumers may also consider a number of bank-offerings, such as high-yield savings accounts and certificates of deposit. These options can be beneficial when young adults decide to start planning for a family or beginning their children’s college savings fund. Additionally, many banks have investment service departments that cater to young investors interested in growing their wealth through investment vehicles. Young adults beginning considering making a first investment should speak with their banking representatives about their options and offerings.
 

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