Stocks and Bonds

1) STOCKS

Stocks represent ownership in companies, and stock markets are the places where stocks are bought and sold. When you own a company’s stock, you own part of that company. If it does well, your stock will do well. 

You can beat the market if your stock is good; if your stock is excellent, you can really beat the market. You can pick the stock in an industry you understand. Also, your money is liquid, meaning you can access it at any time by selling your stock.

Unfortunately, if a company does poorly, so does your stock. Because a stock isn’t diversified, that can mean disaster for you (although you can easily reduce your risk by picking bigger, solid companies).

2) BONDS

Bonds are typically seen as a lower-risk accessory to a stock portfolio. But bonds aren't just for those nearing retirement: They have a place in every portfolio. The question that confuses investors is just how much of their savings should be in bonds.

You know exactly how much you’ll get when you invest in a bond. You can choose the amount of time you want a bond for (1 year, 2 years or 5 years). Longer time periods yield you higher return rates. Also, bonds are extremely stable, especially government bonds. The only way you’d lose money on a government bond is if the government defaulted on its loans–and it doesn’t do that, it just prints more money.

Unfortunately, bonds have significant disadvantages. Because they’re so stable (lower risk), the reward on an excellent bond is dramatically less than an excellent stock. Investing in a bond also renders your money, meaning it’s locked away and inaccessible for a period of time. 

Actually, it’s old people and rich people who find bonds most attractive. Old people need to know exactly how much money they’re getting next month for their medication or whatever old people do; they can’t stand the volatility of the stock market because they generally don’t have much other income to support themselves.