What Are Stocks, Bonds, and Mutual Funds—And Why Should You Care?
Here, we simply want to focus on understanding the basic types of savings and investments. You don’t need to be an expert, but you should understand what each investment does and how it aligns with your goals.
Cash: Our Starting Point
Cash or cash equivalents are among the safer, more familiar asset classes. Common examples include:
Traditional Bank Savings Accounts
Money Market Savings Accounts
High-Yield Savings Accounts
Certificates of deposit (CDs)
Government Treasuries (Short-term debt)
Corporate Commercial Paper (Short-term debt)
Cash is excellent for liquidity, meaning you can access it quickly, and, under normal circumstances, it protects your principal. However, the tradeoff is that cash typically earns less than other investments. In other words, while cash is vital for emergencies and short-term needs, it doesn't accrue interest fast enough to keep up with inflation or grow long-term wealth on its own.
Example: If you save for 5 years at an average 1% interest rate, your $5,000 becomes $5,255. Safe, yes. But not fast-growing.
Bonds: Lending Money to Institutions
Bonds are essentially loans you make to a company or government. In return, they pay you interest over a set period. Because interest payments are usually more predictable, bonds are often considered less risky than stocks, even though they carry multiple levels of risk.
Key points:
Bonds earn interest, which can make them more stable.
Their value can still fluctuate based on market conditions.
They’re helpful for achieving low to moderate growth with less volatility and for diversifying investment holdings.
Stocks: Owning a Piece of the Company
When you buy a stock, you own a part or a “share" of a company. Stocks offer higher potential returns but also come with greater risks.
Important notes:
As a company grows, shareholders can make money through rising stock prices or dividends.
On the other hand, when a company faces difficulties, shareholders might lose their investments.
Research is essential when investing in individual stocks. Public companies are required to file financial statements with the SEC, and these reports are intended, at a minimum, to keep investors informed about a company's financial condition.
Stocks can help your money grow faster over time, but they require long-term thinking and a tolerance for fluctuations.
Example: If you invest for 20 years and earn an average return of 8%, your $5,000 will grow to about $23,000.
Mutual Funds: A Simple Way to Diversify
Mutual funds take some of the guesswork out of investing. You're not the one picking stocks or combing through financial statements. Instead, you effectively join a pool of investors, spreading funds across a variety of investments. Thus, instead of only being able to buy a few stocks or bonds, you buy a piece of a professionally managed portfolio.
Some benefits of mutual funds:
Built-in diversification
Professional fund management
Easier entry points for beginners
Options for conservative, moderate, and aggressive strategies
Before investing in any fund, review its prospectus, a crucial document that outlines the fund’s objectives, risks, fees, and history.
Why This Matters
Understanding the types of investments available to you increases awareness, and with awareness, perhaps, comes more control over your financial future. Think about it: once you’ve funded your emergency savings account, your next question might be, “So… what now?”
For some, assuming they have earned income, the next step might be to fund a work-related retirement account (e.g., a 401(k), 403(b), or Thrift Savings Plan), which is typically made up of pooled investment funds. That means it might be useful to learn about the various types of funds available.
Mutual Funds Vs. Index Funds Vs. ETFs
If you admire a specific company and want to support its growth, exploring individual stocks or bonds could be beneficial too, as long as you do your due diligence.
Understanding your options helps you make deliberate decisions instead of merely guessing or following trends.
Regardless of where you start, try to:
Avoid products that don’t fit your goals
Build a strategy that grows as your life changes
Keeping things simple also means being thoughtful and informed.
Key Takeaway
There’s no single “best” investment, only the one that aligns with your goals, timeline, and comfort level. Begin by learning how cash, bonds, stocks, and investment funds work, and build your knowledge from there. The more clarity you gain now, the more confident you’ll feel making financial decisions as you move through adulthood.
Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.