Stocks, bonds and more: The building blocks of investing

Investing can help you pursue your most important financial goals, but what should you invest in? The building blocks include stocks, bonds, cash equivalents and various kinds of funds. Understanding your choices can help you determine the right investments for you.

stock

A share, or part ownership, of a company.

HOW YOU EARN RETURNS:

Prices fluctuate based on investor demand. Stocks may also provide dividends1 (money paid periodically to investors), which you can pocket or use to buy additional shares.

RISK:

Prices can rise, fall or even drop to zero. Younger or smaller companies, or those in industries with unpredictable revenues, may be riskier than larger, well-established corporations.

MIGHT BE RIGHT FOR YOU IF:

You like to research company fundamentals and are willing to take on risk of loss to get potentially higher returns.

FEES/COSTS:

You may pay a trading fee or commission every time you buy or sell shares.

BUY IT:

Through an account at a brokerage firm; may also be available directly from the company.

bond

A loan to a corporation, a federal or state government or a municipality.

HOW YOU EARN RETURNS:

Interest is paid on the amount of the loan—the bond principal—generally at a predetermined rate and on a fixed schedule. At the end of a specified period, your principal is returned to you.

RISK:

Bond issuers promise to return your principal, but you could still lose your investment if they default. Bond prices typically fluctuate less than stock prices, but a rise in interest rates could reduce demand for existing bonds and push down prices.2

MIGHT BE RIGHT FOR YOU IF:

You are seeking an investment that provides a stream of income; bonds may provide some stability when markets are volatile.

FEES/COSTS:

You may pay a transaction fee when you buy, often in the form of a markup on the bond price
that is a percentage of its value.

BUY IT:

Through an account at a brokerage firm or directly from the issuer.

cash equivalent

A short-term investment, such as a U.S. Treasury bill or a money market mutual fund, that you can easily convert to cash.

HOW YOU EARN RETURNS:

Most cash equivalents pay interest.

RISK:

Your returns may not keep up with inflation and won’t offer the same opportunity for growth as higher risk investments. The principal of these investments can lose value, but the prices will typically fluctuate much less than stocks or bonds.

MIGHT BE RIGHT FOR YOU IF:

You have short-term spending needs or goals, or you don’t want to purchase riskier assets because you fear a market downturn. Be sure to request a prospectus from the fund company and read it carefully.

FEES/COSTS:

These vary depending on the kind of investment; there may be transaction fees and early withdrawal fees.

BUY IT:

Through an account at a brokerage firm.

mutual fund

A professionally managed selection of diversified investments such as stocks, bonds or both. It is priced and can be bought or sold once a day, after the market closes.

HOW YOU EARN RETURNS:

Dividends, interest payments and investing profits from underlying investments may be distributed to shareholders. You can also make or lose money when you sell your shares.

RISK:

Prices can go up and down. Although the diversification of funds may help reduce their risk, it cannot protect against loss or ensure a profit.

MIGHT BE RIGHT FOR YOU IF:

You want a convenient, professionally managed solution to diversify your holdings.

FEES/COSTS:

Investors in a fund pay a fee for management, operating expenses and marketing—a cost known as the fund’s expense ratio. When you buy or sell shares of the fund, you may also pay a fixed transaction fee, or there may be a “load”—a cost based on a percentage of the fund’s value.

BUY IT:

Through your retirement plan, an account at a brokerage firm or directly from a mutual fund company.

exchange-traded fund (etf)

A selection of stocks, bonds or other assets that often aims to mirror the composition and performance of a market index or sector. ETFs can be purchased on stock exchanges at prices that may change while markets are open.

HOW YOU EARN RETURNS:

Prices fluctuate based on demand and the performance of underlying investments. When investments in an ETF pay dividends or interest, that cash is passed along to investors.

RISK:

Prices can go up and down. Although the diversification of ETFs may help reduce their risk, it cannot protect against loss or ensure a profit.

MIGHT BE RIGHT FOR YOU IF:

You want a convenient, diversified way to invest. If you want to limit taxes on investments, ETFs can be more tax-efficient than mutual funds.

FEES/COSTS:

Like mutual fund investors, owners of ETFs pay an expense ratio, but ETF costs tend to be much lower, in part because investments within an ETF trade less frequently than those in mutual funds. You may pay a trading fee or commission every time you buy or sell shares, though there are many commission-free ETF offerings.

BUY IT:

Through your retirement plan or an account at a brokerage firm.

Now that you have a general understanding of how these investment types work, you can think about which ones may help you pursue your financial goals. In general, a mix of investments could help you strike the right balance between risk and potential returns.



  1. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.
  2. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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For a current prospectus of money market or mutual funds, be sure to request a prospectus and/or a summary prospectus from your broker or from the fund company and read it carefully. Before investing, carefully consider the investment objectives, risks, and charges and expenses of the fund. This and other information may be found in the fund’s prospectus and/or, if available, summary prospectus. Read the prospectus carefully before investing. Investments in the funds are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the funds.

Investing involves risk including loss of principal.

This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument or strategy.

Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

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