Investing, it is making your money work for you. The goal is to put your money in a vehicle with a positive rate of return, which is usually, but not always, expressed in interest rates. There are a number of different investment vehicles, suitable for different purposes. We will cover a series of features related to all investments and compare the two most common investment vehicles, stocks versus bonds.
Shares are shares of a company, whether listed on the stock exchange or stock market, consider them as a small percentage of the company's property. As a shareholder, you have voting obligations for selecting officers of the company and you will receive a quarterly earnings share (called dividend).
Bonds lend money to a company or government, in return for a pledge of more money when the debt is repaid; Bond rates are generally in the range of 2 to 5% APY and can be maintained for varying periods of time. There are products called bond funds that buy a portfolio of bonds to have some liquidity, and there are bond markets that go even further.
Stocks and bonds are called securities. Now, let's move on to an investment terminology.
First of all, there is the rate of return. This is the percentage of the initial purchase price that you get each year back on the investment. For example, if you hold a savings account with a 3% interest and you put $ 100 in it, after one year you get $ 103. Interest and rates of return worsen if you let them sit long enough, for example, if you let $ 103 stay in the account, the next year it will go to $ 106.09 the second year assuming all other variables remain the same.
Secondly, there is volatility. Volatility is the rate at which a security changes in price, highly volatile securities may change the price (up or down) very quickly. It is possible to earn a lot of money by trading high volatility stocks or day trading. It is also possible to lose a lot of money by doing it. In general, stocks are more volatile than bonds in the US market.
The things that will make stock prices fall will drive up bond prices, so it's always worth having a mix of both in your portfolio. In the long run, equities perform well and penny stocks (stocks of new companies that start trading at less than $ 1 per share) can generate huge returns on stock prices. and can double, triple or more in days. As your investments shift from wealth generation to wealth preservation and income generation, you will want to move your highly volatile stock choices to safer bonds, especially at the same time. 39, approaching retirement.
The question is not "what are the best, the stocks or the bonds?" rather, it is "What percentage should I allocate to each?"