As an investor, you have a variety of options to choose from, including stocks and bonds. The investment you select depends on your financial goals, your investment preferences, and your tolerance for risk.
These options represent traditional investments: You put your money down and hold on. Although you want to make changes as necessary to protect your investment, these types of investments can add stability to more aggressive — and riskier — investment strategies (like trading and hedging).
Investing in stocks
When you buy stock, you’re buying ownership in a corporation (or company). The benefit of owning stock in a corporation is that whenever the corporation profits, you profit as well. Typically, investors buy stocks and hold them for a long time, making decisions along the way about reallocating investment capital as financial needs change, selling underperformers, and so on.
As an investor, you want to make sure that your stock portfolio is carefully balanced among the different types of stocks (growth, value, domestic, international, and so on) and your other investments. A well-balanced traditional portfolio (which includes stocks and long-, short-, and intermediate-term bonds) generally offers a steady return of between 5 and 12 percent, depending on the specific investments and the amount of risk you’re willing to assume.
Investing in bonds
To raise money, governments, government agencies, municipalities, and corporations can sell bonds. When you buy a bond, you’re essentially lending money to this entity for the promise of repayment in addition to a specified annual return. In that sense, a bond is really nothing more than an IOU with a serial number. Some people, to sound impressive, call bonds debt securities or fixed-income securities.
Although some entities are more reliable than others, bonds generally offer stability and predictability well beyond that of most other investments. Because you are, in most cases, receiving a steady stream of income (the annual returns, for example), and because you expect to get your principal back in one piece (at the end of the bond’s life), bonds tend to be more conservative investments than stocks, commodities, or collectibles.