Investment terms can sound intimidating, but the main building blocks are straightforward. Most portfolios are made from three things: stocks, bonds and funds that hold a mix of them. This guide explains what each one is and how they differ.
Stocks (shares)
A stock represents a small ownership stake in a company. If the company grows and becomes more profitable, the share price may rise. Some companies also pay part of their profits to shareholders as dividends. The flip side is that prices can fall sharply, and in the worst case a company can fail and the shares lose most or all of their value.
Bonds
A bond is a loan. You lend money to a government or company, and they promise to pay regular interest and return the original amount on a set date. Bonds are often less volatile than stocks, but they are not risk-free. The issuer could fail to pay, and bond prices can fall when interest rates rise.
Funds
A fund pools money from many investors and spends it on a collection of assets. Instead of choosing individual companies, you buy a slice of the whole collection. Common types include:
- Index funds, which aim to track a market index rather than beat it.
- Actively managed funds, where a manager selects investments, usually at a higher cost.
- Exchange-traded funds (ETFs), which are funds that trade on an exchange like a share.
Side-by-side comparison
| Type | What you own | How it can earn | Main risk |
|---|---|---|---|
| Stocks | Part of a company | Price growth, dividends | Large price swings, company failure |
| Bonds | A loan to a borrower | Interest payments | Default, falling prices when rates rise |
| Funds | A basket of assets | Depends on contents | Market risk plus fees |
Which is right for you?
There is no single answer. It depends on your goals, timeline and comfort with ups and downs. Younger investors with long horizons often hold a larger share of stocks, while those nearing a goal may prefer more bonds and cash. Whatever you choose, check the fees, read the fund documents and avoid putting everything into one holding.
This article explains concepts only and does not recommend any specific investment.
