Stocks

Stocks are an investment in a company and are very common in the financial world. If you own a stock, you are a part owner of the business. Stocks are more volatile than bonds, meaning there typically is more risk, but the returns are frequently greater.

The value of stocks fluctuate, meaning at any point, your original investment could be more or less than the stock is worth. In theory, the goal of buying stocks is to sell them at a higher price than you bought them, but doing so is easier said than done. There are many different strategies as to when to buy or sell stocks. A fiduciary can help you develop an investment strategy based on your risk tolerance.

Another way to make money from stocks is by receiving dividends, which are a share of the company’s profits. Not all stocks provide dividends.

Stocks are purchased inside a brokerage account, which is an account that allows you to deposit money that is used by your broker to acquire different investments and stocks. Stocks are sold in whole numbers of shares from one to hundreds of thousands of shares.

Bonds

One of the biggest differences between stocks, bonds, and mutual funds is how each of them allows you to invest your money. For example, bonds are actually a loan to a company or the government.

Each bond has a maturity date, which is when a bond is redeemed at its par or face value. At the time of maturity, you—the bondholder— will receive the original amount of money you invested back plus interest. Though less volatile than stocks, bondholders can lose money if the value of their bonds decrease. This can happen due to higher interest rates or if the credit quality—a criteria that informs investors of the risk of default—of the bond decreases prior to maturity.

Unlike stocks, the commission to buy a bond is hidden inside the price of the bond. Typically, a bond purchaser pays a 2% commission to buy and another 2% to sell a bond. One way to minimize this cost is to buy a bond that you expect to hold to maturity, which is the date the bond officially ends. There is no commission to get your money back when the bond matures.

Mutual Funds

A mutual fund is made up of a pool of money collected from many different investors for the purpose of investing in stocks, bonds, real estate, or money market accounts.

A mutual fund can be a passive investment, meaning that those who invest do not have an active strategy for buying and selling the investments in the fund. Instead, they try to imitate an index, which is the number that refers to the value of the investments. Passive investors follow the stock market indexes to help model their mutual funds. Dow Jones Industrial Average, S&P 500 Index, and Russell 2000 Index are great examples of stock market indexes.

Another kind of mutual fund is referred to as an active fund. Active funds are controlled by a manager who actively strategizes and makes all the buy, hold, and sell decisions. The manager of a mutual fund will design and maintain the fund to match its investment goals as stated in the fund’s prospectus, a legal document that outlines details about the investments. Always read the prospectus before buying a fund.

Some funds are loaded, meaning there is a sales charge to the broker who sold you the fund, and some funds are no-load. Loaded funds do not necessarily perform better than no-load funds, so always take the time to review your options. Funds also have an annual expense ratio that reduces the investor’s return. An annual expense ratio of 0.05% is extremely low and an expense ratio of 1.5% is very high.

We hope this explanation of the difference between stocks, bonds, and mutual funds were able to give you a better idea of the many investment opportunities available to you. Lorenz Financial is happy to sit down and talk with you about your options.

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

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