The Building Blocks of Investing
Stocks and bonds are two of the most fundamental types of investments. Understanding their differences and how they work is essential for anyone starting their investing journey.
Key Concepts
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Stocks (Equity): When you buy a stock, you become a part-owner (shareholder) of a company.
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Potential for Growth: Stock prices can increase, and you might receive dividends (a portion of the company's profits).
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Higher Risk: Stock prices can be volatile and go down.
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Bonds (Debt): When you buy a bond, you are essentially lending money to a company or a government.
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Regular Income: You receive regular interest payments.
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Lower Risk: Generally considered less risky than stocks, as you get your principal back at maturity (unless the issuer defaults).
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Lower Potential Return: Typically offer lower returns than stocks.
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Diversification with Stocks and Bonds: Combining both helps balance risk and reward in a portfolio.
How They Work (Simplified):
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Stocks: You buy shares, hoping the company grows and the shares increase in value, or that they pay dividends.
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Bonds: You buy a bond, and the issuer promises to pay you back the original amount plus interest over a set period.