Beginner Investing 101: Comparing Stocks and Bonds

Posted by Eric LeRiche | January 7, 2009 .

If you’re a beginner in investing, one of the things you’ll find out soon enough is that you have
plenty of investing options. As a beginner in investing, you may also feel overwhelmed; however,
when you gain a basic understanding of the different investing options available, that feeling of
being overwhelmed is going to be replaced by excitement – you’ll feel like a child in a candy
store.

Stocks and bonds are two of traditional investment options people are most familiar with. If you
were to peer into the average investor’s portfolio, you’ll most likely find about a dozen stock
investments, some mutual funds and a few bonds.
As a beginner in investing, one of the basic things you need to know is that stock and bonds work
together in balancing your risks in your investment portfolios. Stocks inherently carry a higher
risk. Bonds, on the other hand, are lower risk investments. As beginner in investing, one of the
things you need to learn is to build a portfolio that has a balanced amount of risk. This is
what’s called a “healthy” portfolio.

Mention the word “investing” and most people automatically things “stocks.” Basically, stocks are
considered the main investment types for millions of people. Stocks are also what mostly comprise
mutual funds and other forms of investing.

In simple terms, you’re owner of a piece of a company if you own a share of that company’s stock.
Basically, you invest on a share of a company’s stock if you think the company is going to grow;
you make a profit from your share of stocks when the value of the company increases. In a way,
you are giving your vote of confidence to a company when you invest in a share of stocks.
When you buy a share of stock in a company, that company receives the money you invest in. The
company in turn uses it to invest. When the value of the stock of that company goes up, you can
profit from it by selling your share. If you think the value is going to go up higher, you can
keep it and sell it later on for more profits.

In general stocks is divided in two main categories: high risk stocks and low risk stocks. As a
beginner in investing, it’s important that you understand that all stocks carry risks, including
“blue chip” stocks, stocks that are regarded as the safest stocks to invest in. Airline stocks
and technology company stocks tend to be high risk stocks. Energy stocks are fairly stable
stocks.

Blue chip stocks are, as mentioned, are the safest stocks to invest in. This is because these
stocks are stocks in companies that have been around for a long time and have a track record of
being profitable. Stocks by Shell Oil and Microsoft are regarded as blue chip stocks.
Theoretically, blue chip stocks can still lose you money but the chances are low since a company
like Shell Oil or Microsoft isn’t likely to go out of business the next day compared to a
start-up company that’s recently gone public.

Compared to stocks, bonds are a lower risk investment type. In fact, many people who go into
investing usually make bonds their first investment. There are many types of bonds, such as
municipal bonds, war bonds and commercial bonds. When you invest in bonds, you can cash them on a
certain date in the future for a profit. Bonds aren’t just for those who are just starting out in
investing; even the big-time investors buy bonds because they’re relatively safer to invest in
than stocks.

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