Discover Basic Investing Terms
This guide will explain everything you’ll need to start understanding the what and why of building your first portfolio.
What are stocks and bonds?
- A stock is partial ownership of a company
- A bond is a loan you make to a company, government, or municipality that they agree to pay back, with interest
- Fractional shares are tiny slices of a share
What’s a stock?
A stock represents partial ownership in the assets and earnings of a company. The company sells stock to investors as a way raise cash to expand its business. Stocks may also be called equities.
Stocks are broken down into shares. For example, if you purchase AT&T stock, you now own shares of the stock. You are a shareholder.
Each share of stock has a value that changes every day. For example, if hypothetically you were to purchase 10 shares of AT&T at $35 a share, you’d pay $350 for those shares.1
In order to buy stock in a company, that company needs to be publically traded on an exchange, such as the New York Stock Exchange or Nasdaq. There are exchanges all over the world, including Europe’s Euronext and China’s Shanghai Stock Exchange.
When you read the news that a company announced its IPO, it’s announcing its initial public offering. An IPO is the first time the stock of a private company is offered for sale to the public.
Shareholders have power. Even if you only hold a single share, as a shareholder, you own a portion of that company. That’s a pretty cool thing.
Why do stocks go up and down? We’ll talk about this in our next guide Expand Your Horizons: Basic Investing Concepts.
What’s a bond?
A company, government, or municipality can raise money by issuing bonds.
A bond is what’s called a “debt instrument.” When you purchase a bond, you’re essentially lending money to whoever is issuing that debt.
Bond issuers borrow funds for a defined period of time, at a fixed interest rate. When you purchase a bond, you will receive interest at regular intervals, plus the initial amount you loaned.
This is why bonds that are considered ‘investment grade’ are considered particularly low risk. You know how much you will get, and when.
What’s a fractional share?
Hot tip: Fractional shares are a great way to start building a portfolio starting with the money you have.
They’re just what they sound like — fractions, or pieces of a whole share of stock, bond, or fund. You’re still investing in the company, but you don’t need to wait until you’ve got enough money to purchase an entire share.
For example, instead of having to find $171 to buy a full share of Apple, you can buy a small fraction of that, a fractional share.2
How do fractional shares add up to anything? Little amounts can earn interest, and that interest can compound over time.
It’s true: You can invest companies that excite you or sectors (technology, healthcare, aerospace and defense) that you think will pave the way toward a better future.
And you can start with just $5.
What are funds?
- Funds bundle together a variety of stocks, bonds, cash, or a combination.
- Examples of funds include index funds, mutual funds, and exchange-traded funds (ETFs)
- Funds can provide diversification
You’re probably more familiar with funds than you think. A fund is simply a pool of money that will be used for a particular purpose. A college fund is a great example.
When talking about investing, more common types of funds are mutual funds, index funds, or exchange-traded funds.
Funds bundle together a variety of stocks, bonds, cash, or a combination of all three. This is part of what can make funds so great for beginner investors. This is particularly true of exchange-traded funds.
Because funds bundle together different investments, whether this is all equity (stocks) of technology companies, or bonds from major municipalities in the United States, a fund that bundles together multiple investments is more diversified than buying a single stock or a bond.
And as we discussed in Introduction to Investing, diversification is one of the most important aspects of solid investing strategy.
How do you create a portfolio?
- Your portfolio is all the investments you hold
- Every portfolio is different
- Your portfolio may change according to your goals and risk level
A portfolio is simply your ‘collection’ of investments. All the investments you hold make up your portfolio.
Just as an artist may have a portfolio of their work, representing everything they’ve made, your portfolio is all the investments you’ve bought that you currently hold.
You can have stocks, bonds, funds, real estate, and cash in a portfolio.
The investments in your portfolio may depend on your goals, age, beliefs, and appetite for risk. A solid foundation of diversified funds that you can buy and hold for the long term is an important start, and then you can build out your portfolio to reflect your interests and changing goals.
Creating a portfolio is about balance. In the next guide, we’ll talk more about risk, which is an essential part of creating any portfolio.
As you get more and more comfortable with investing (and all the terms and ideas involved with it) you’ll start to learn how you may want to change your portfolio over time.
Which of the following statements about stocks is false?
The value of a stock always stays the same. Stocks can be volatile, meaning their prices can go up and down. In fact, a stock’s price can change throughout the day. These fluctuations can be the result of the company’s earnings, its valuation, or other factors affecting markets.
Which of the following is true of stocks?
You can buy stocks of publicly traded companies. In order to buy stock in a company, that company needs to be publicly traded on an exchange, such as the New York Stock Exchange or Nasdaq.
Which of the following is true of bonds?
The interest rate of an investment-grade bond is fixed. When you purchase a bond, you know in advance how much interest you will receive, in addition to getting the original amount you loaned. This is why investment-grade bonds are considered particularly low risk. You know how much you will get, and when.
How do stocks and bonds differ?
A stock is partial ownership of a company, a bond is a loan. A stock represents partial ownership in the assets and earnings of a company and a bond is a loan. The company sells shares to investors as a way to raise cash to expand its business. A bond is a debt. When you purchase a bond, you’re essentially lending money to whoever issues that debt. That could be the U.S. government or a corporation, as two examples.
Which of the following statements about funds is false?
Funds are too risky for beginner investors. A fund that contains multiple types of investments is more diversified than buying a single stock or bond. This can make funds less risky and can make them a solid choice for beginner investors.
Which of the following statements about investment portfolios is false?
Older investors should own a greater percentage of stocks than younger investors. When you’re younger and investing for the long term, you have more time to weather storms in the market. Therefore, younger investors can afford to be more aggressive, with more stocks. Older investors nearing retirement age may want to invest more conservatively with a greater ratio of bonds to stocks.