If you are looking to invest money, one of the best ways is to invest in stocks.
So what is it that makes stocks the best investment?
For one, stocks tend to have higher average returns than bonds.
The average annual return for stocks is about 10.4% and bonds only bring up the average with a 5.9% average return.
Another reason to invest in stocks is that stocks do not have any major movements in their value as a bond would.
For instance, one day, bonds may go up 5% and the next day, they may go down 5%.
Stocks, however, maybe going up or down 5% but they are very volatile.
When you own a stock, you have a small investment in a company, which helps you earn that 10% average return each year.
Of course, there is the risk of investing in stocks
In fact, Warren Buffett said:
Risk comes to all of us. It is the price we pay to live in a free society.
But with time, we can build wealth.
And, we can earn a lot of wealth.
And, when we invest in stocks, we should consider all the risks before choosing to invest.
Bonds
The bond market is the oldest and most popular way to invest money.
Bonds are where we borrow money from the bank to invest.
Bonds are offered to us through banks and investment firms, like mutual funds.
Bonds allow us to borrow money for a short period of time.
For example, let’s say we need to borrow $100 for a short period of time, say 6 months.
We can borrow that money at a low-interest rate, like 1%.
We invest the money we borrowed for a while and then we pay the money back.
This process continues until the loan is paid off.
Of course, there is the risk with bonds.
For instance, the United States government has never defaulted on its debt, but that does not mean it cannot happen.
Even if it were to happen, the U.S. government would still pay the principal and interest on the debt.
And, as the U.S. government would, we would be paid back eventually.
Bonds are also highly leveraged, meaning they have higher interest rates than the U.S. government.
What is more, for those who invest in bonds, the more bonds you buy, the more you will have to pay for the underlying bonds.
In other words, higher returns could result in higher risk and higher costs.
So the bonds you buy will affect your returns.
But it is possible to avoid having too much interest paid on the bonds you own.
If you own many bonds, they will help you earn a good return over time.
Let’s say you have a portfolio of 10-year bonds paying 2% interest.
If your portfolio of bonds was 100% of your total money, you would earn 2% (100%) on $10,000 over a 10 year period.
When it comes to bonds, the more you own, the better.
Stocks
Stocks, on the other hand, are another investment.
Stocks are created by individual companies.
Stocks are considered the riskier investment of all and are not insured by the government like bonds are.
They are, however, traded on the stock market, which helps lessen some of the risks.
Today, when we talk about stocks, we’re talking about the U.S. stock market.
But not all companies on the stock market are U.S. companies.
For example, one of the most popular companies in the stock market is Apple, an American tech company.
For decades, Apple has been growing with innovations in consumer technology.
Today, its products are in our homes, our offices, and our cars.
And, Apple makes up 25% of the Dow Jones Industrial Index, making it one of the most recognizable names in American business.
Of course, there is a risk with Apple.
For instance, Apple is very expensive with a stock market capitalization of $917.2 billion and a PE ratio of 27.17.
But, Apple has good assets, which helps explain why it is priced at such a high level.
Many investors believe that Apple’s products have great potential, and they will profit in the long-term.
Whatever Apple does in the future, investors have the opportunity to profit.
Individual stock
Let’s talk about individual stocks.
In many cases, stocks are very expensive, and have only limited returns, since there is more risk involved than in the bond market.
That’s why the individual stock market is best for those investors who are new to investing.
But there are other options.
When the stock market is doing well, like in the 1990s, many stocks have been going up.
However, they are not always doing well, as the dot-com bubble demonstrated.
And, there are different types of stocks, each with different opportunities.
For example, we can own public companies such as Apple or General Electric.
We can also own companies that are privately owned, like Starbucks, or we can invest in other types of investments.
According to Investopedia, there are two major categories of stocks.
There is common stock, which represents individual stocks.
And, there is preferred stock.
Common stocks are the type of stock most investors have.
Many publicly traded companies only have common stock and are not listed on an exchange.
These are the stocks that are going up most often because they are usually in high demand.
Companies often issue new common stocks as they grow or raise capital.
Often, investors buy these shares, and they own a part of the company.
But, the value of common stock is based on the value of the company, not the company’s performance.
