A Simple Explanation of Stocks, Bonds, and ETFs for Young Investors

The world of investing is full of jargon, but you only need to understand a few key building blocks to get started. Let's break down the three most common types of investments—stocks, bonds, and ETFs—in simple terms.

Stocks: Owning a Piece of the Pie

What it is: A stock (also called a share or equity) is a small piece of ownership in a single company. When you buy a share of Apple, you become a part-owner of Apple.

How you make money: You make money if the company does well and its stock price goes up. You can then sell it for a profit. Some companies also pay out a portion of their profits to shareholders, which is called a dividend.

The risk: Stocks are generally considered higher risk because if the company performs poorly, its stock price can go down, and you could lose money. However, they also offer the highest potential for long-term growth.

Bonds: Loaning Your Money

What it is: A bond is essentially a loan you make to a government or a company. In return for your loan, they promise to pay you back in full on a specific date, and along the way, they pay you regular interest payments.

How you make money: You earn money from the fixed interest payments you receive over the life of the bond.

The risk: Bonds are generally considered safer than stocks. Their prices don't fluctuate as much, and they provide a more predictable stream of income. The main risk is that the issuer could default on their loan, but this is rare for strong governments and large companies.

ETFs: The Best of Both Worlds

What it is: An ETF (Exchange-Traded Fund) is a basket that holds many different investments at once. An ETF can hold hundreds or even thousands of stocks, bonds, or a mix of both.

How you make money: When you buy a share of an ETF, you're buying a tiny piece of all the investments inside it. You make money as the overall value of the assets in the basket goes up.

The risk: ETFs are the ultimate tool for diversification. Because you're invested in many different assets, the poor performance of one is balanced out by the others. This makes them much less risky than buying a single stock and is why they are perfect for beginners.