Financial Terms Everyone Should Know – Stocks & Bonds

There are two basic types of securities that most people invest in, and they comprise most mutual funds – stocks and bonds. While often lumped together under the terms investments or securities, they are very different.

Stocks, also known as equities, are securities that represent fractional ownership in a corporation. Share owners actually own a piece of the corporation that issued the stock, and are entitled to a proportional share of the assets and profits of the corporation. The value of a stock is affected by a number of variables, but is tied to the value and future profitability of the company, and can be rather volatile.

Bonds, on the other hand, are debt instruments. Businesses, localities, states, and nations use bonds to raise money by borrowing from investors. Think of it as an I.O.U. between the issuer and lender.  Bonds typically pay a fixed rate of interest (although some pay a variable rate), called dividends. These dividends are paid until the bond’s maturity date, at which time the amount of the “loan” is repaid. While bonds pay a fixed rate while held, the current value of a bond can change based on general interest rates, the amount of time until the bond’s maturity, and the potential of the borrower to default on the loan.

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