Stocks, ETFs, index funds, bonds and cash
- Tell the main asset types apart
- Understand what a fund is and why funds help beginners
- Know the basic risk and return trade-off between stocks, bonds and cash
Individual stocks
Buying a single company’s stock gives you its full upside and its full downside. If that one company stumbles, your investment can fall sharply, and in rare cases go to zero.
Picking individual stocks takes research and attention, and even professionals often fail to beat a simple index over time.
Funds, ETFs and index funds
A fund pools money from many investors to buy many investments at once. One purchase can give you a slice of hundreds of companies.
An exchange-traded fund (ETF) is a fund that trades on an exchange like a stock, so you can buy and sell it during the day. A mutual fund is bought from the fund company at a price set once a day.
An index fund tries to copy an index, such as the S&P 500 (about 500 large US companies), instead of choosing winners. Because it does not need a team of stock pickers, it usually charges a low yearly fee, called the expense ratio.
Bonds
A bond is a loan you make to a government or company. In return you usually receive regular interest payments and your money back at a set date, the maturity.
Bonds are generally steadier than stocks but grow more slowly. Their prices fall when interest rates rise, because new bonds start paying more, so they are not risk-free.
Cash and cash-like holdings
Cash in a bank account or money market fund is stable and easy to use, but over long periods inflation can erode what it buys.
A simple way to see the trade-off: stocks have historically offered the highest long-run growth with the biggest swings, bonds sit in the middle, and cash offers stability with the lowest growth.
Suppose you have $500. Buying shares of one company means your result depends on that business alone. Buying $500 of an S&P 500 index ETF spreads it across roughly 500 companies, so your largest single holding is only a few percent of the fund.
If the fund’s expense ratio is 0.05% a year, the cost on $500 is about $0.25 per year. A fund charging 1% would cost $5 a year on the same money, and that difference compounds over decades.
Key terms
- Fund
- A pool of money from many investors used to buy a collection of investments.
- ETF (exchange-traded fund)
- A fund whose shares trade on an exchange throughout the day like a stock.
- Index fund
- A fund that copies a market index instead of picking investments.
- Expense ratio
- The yearly fee a fund charges, as a percentage of the money invested.
- Bond
- A loan to a government or company that pays interest and returns the principal at maturity.
- Maturity
- The date on which a bond repays its principal.
- S&P 500
- An index of about 500 large US companies, widely used as a benchmark for the US stock market.
Open SPY in Stock Analysis and compare its one-year chart with any single stock you know. Which moved more? Note the biggest drop in each.
Key takeaways
- Single stocks concentrate risk; funds spread it.
- Index funds copy a market at low cost; fees matter over decades.
- Bonds are loans: steadier, slower, not risk-free.
- Cash is stable but can lose buying power to inflation.