What’s the difference between Stocks, Bonds, Options, & Mutual Funds?

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Investing opens the door to building generational wealth, getting close to F.I.R.E., or setting yourself up early for success. 

For new investors, the investing world can feel overwhelming with countless information, terminology, and where to start. 

Where do investors begin? 

Before picking a specific investment, here’s a guide and comparison to understand the different investment options for teenagers.

Stocks

A stock is buying a piece of the company or partial ownership. By owning stocks, you’ll be a stakeholder for the company and believe the price will increase in value for the upcoming years. For the intention of buying a stock, the goal is to purchase early with the expectation the company will continue to perform well. 

Pros

• Purchase partial or whole stocks

• Potential dividends

• Stakeholder for decisions (annual meetings and voting for options)

• Short-term or long-term options for holding

Cons

• Volatility based on the company’s performance

• The sole management of the stock

Bonds

A bond is a certificate given by setting a specific amount of money to the organization/government in exchange for a fixed interest. The bond created will be given a maturity date, ensuring the money given after a specific time frame will be reimbursed with interest included. There are a few different options for bonds:

Corporate Bonds - Banks offer the bond to the investor

Municipal Bonds - The government offers the bond to the investor

Commercial Bonds - Companies offer the bond to the investor

Pros

• Lower risk

• Fixed interest rate

• Ensured money is given back after the maturity date

Cons

• No liquidity

• The interest rate may increase

• Long term 

Options

A buyer places a hold on the stock’s price without finalizing the purchase. Whether the price increases or decreases, the buyer has the opportunity to sell at the given price point without any extra charge. 

Though the returns can be high, there is risk depending on the type of option you purchase. It’s important to distinguish the difference between a hold and a put. Depending on the type of option, the risk can vary and the buyer needs to be aware of due diligence. 

Options are a high risk, high reward, and are similar to day trading. However, conduct research and ensure you do your homework before giving options a chance. 

Pros

• High reward

• Betting the price before it reaches

Cons

• High risk

• Dependent on the market’s performance

Mutual Funds

Rather than buying a single stock, a mutual fund is comprised of multiple stocks in one basket. The price for the mutual fund is a lump sum of the stocks offered at a cheaper price for individuals. Wealth managers are buying the stocks and putting them all together into a mutual fund.

Pros

• Easy entry to invest in multiple companies for a lower cost

• No management required

• Dividends

• Less risk

Cons

• The annual rate charged (0.3 & up depending on the type)

• Lower returns

In terms of which option may suit you, it depends on several factors: initial investment, level of risk, return rate, and interest. However, it’s important to conduct careful research and understand each option before choosing one. 

Lower risk level - Bonds & Mutual Funds

Medium-High risk level - Stocks & Options