Home > Articles > Business & Management > Finance & Investing

  • Print
  • + Share This
This chapter is from the book

Stocks, Bonds, and Mutual Funds

Gone are the days when the stock and bond market was the exclusive domain of high rollers. Today, anyone can be a successful investor in this market with a little time and effort. Even though you have a crack financial support team behind you, it is crucial to know how these investments work.

When you purchase stock in a particular company, you invest in that company as an owner (shareholder). As a shareholder, you allocate your money for use in the company's operations, and in return for your investment, you are entitled to a share of the profits. Those earnings are either paid back to you in the form of dividends, or the earnings are retained to grow the company's business. As the value of the company grows, so does the value of your shares of stock. On the flip side, as a shareholder, you are also subject to a portion of losses if the company is not profitable. Your loss is usually represented by a decrease in the stock price.

Over time, stocks have proven to outperform virtually all other investments. That doesn't mean that stocks will always beat bonds or real estate in a particular year. But it does mean that over the long-term, stocks, generally speaking, are the investment most likely to grow in value. Since 1961, stocks have returned an average of more than 10 percent per year. The average bank saving account or CD generally returns no more than 2 or 3 percent per year. Even though stocks have historically outperformed other investments, stocks can also deliver significant losses. The rate of return just cited is an average; while some stocks show gain over time, others show losses, some even losing 100% of their value—not only do you not see any growth in your investment, you lose everything you have invested too.

It is worth noting that when a stock goes up or down in value, you only recognize that gain or loss when you sell the shares. These are "paper" gains or losses. Staying in the market over the long-term will mitigate the market's short-term ups and downs. It may be difficult to watch a particular stock go down, but rather than sell in a panic and take the loss, you should first analyze the company, and with advice from your financial professional, try to predict whether or not the trend will turn around.

Avoid the temptation to "play the market" or day trade. This type of strategy attempts to bypass the natural, long-term growth of the stock market, so it can backfire. Also every time you buy or sell a share of stock, you pay a transaction fee, so by repeatedly buying and selling, the transaction fees eat away at your profits. You can probably see that an individual with a high M (Money) score would enjoy stock market trading but might also need to be cautioned not to "play the market."

Another investment option is bonds, a relatively steady, safe way to invest. While stocks represent ownership in a business, a bond is a loan to a business (or municipality, government, or utility). Some bonds are exempt from the payment of certain taxes, and all bonds state that you will be paid back by a certain date (maturity date) at a specified rate of interest. Bonds are generally bought and sold on the bond market, which means that even though the term of the bond is for a stated time, you do not have to hold it for that length of time. You can buy and sell bonds with the same speed as you can make stock trades.

Most bonds pay interest semi-annually, and they are redeemed for the face amount when they reach maturity. Since the rate is contractual, bonds are considered safer investments. When you decide to buy bonds, however, you may be tempted to buy ones with the highest yields. But yields can be misleading, so consider the quality of the bond itself and the credit or strength of the company, municipality, or other bond issuer. No yield (promised return on your investment) can make up for the issuer's inability to pay its debt to bondholders if they go out of business or file for bankruptcy. Bond yields are usually expressed two ways: current yield and yield to maturity. Current yield is the annual interest or return on the amount you paid for a bond. Yield to maturity is the total return you receive by holding the bond until the date it matures. It equals the interest you receive from the time you purchase the bond until maturity, plus any gain or loss from whatever price you paid to buy the bond initially. If you purchase a bond with a 6% coupon (interest), its yield to maturity is 6%. If you pay more than its face value, the yield to maturity will be lower than 6%. If you purchased it below its face value, the bond will have a yield to maturity higher than 6%.

One of the ways you can determine the quality of a bond is by researching the credit rating of the issuer. Most bonds are rated by Moody's Investors Service or Standard and Poor's Corporation. Both use a slightly different format of letter grades to represent the overall health of the bond issuer. For example, ratings above Baa/BBB (Moody's/Standard and Poor's) are considered investment grade, which means they generally qualify for commercial bank investment. Ratings below these rankings are more speculative and have a higher risk of default.

Before you buy any stocks or bonds individually, you should thoroughly research the company or other issuer in which you are investing. This can take a great deal of time before deciding to invest and in monitoring their worth over time. These investments should never be bought or sold on whim, impulse, or on a "hot tip" from a friend or family member. If you are leery of investing the time or have little interest in or desire for learning to analyze several companies' investment potential, there are other investments to consider: mutual funds, exchange traded funds, other types of unit investment trusts, and real estate investment trusts to name a few.

Before you invest in any fund or trust, however, be sure you understand the objectives of the investment company offering the fund or trust to investors. Armed with knowledge about the particular goals, objectives, companies, growth potential and other market and legal information, you will still benefit from receiving investment advice from your financial professional(s). Although we go into a little detail in the following sections about certain investments, this is no substitute for the education you will need to become a knowledgeable investor. Take the time to learn everything you can about investing, or join an investment club if you prefer not to go it alone. Investing can be exciting, rewarding and fun, especially when your financial advisor has a knack for helping you become educated.

Many investors choose mutual funds to help them get started, and for good reason. A mutual fund is a portfolio of stocks, bonds, or other securities owned by numerous investors. Since mutual funds pool money from many different investors, they have millions of dollars to invest and can build a portfolio of hundreds of individual stocks, bonds, or other investments to achieve diversification. What this means is that the law of averages is in effect—if a particular stock goes down, there are other, better performing stocks that will mitigate that loss. Mutual funds are managed by professional fund managers who make the buying and selling decisions for all investments.

Most mutual funds are built around clear investment objectives. Some focus on only one particular industry such as health care or technology. Other funds are created to meet specific investment objectives such as safety of capital, high income, or growth. There are even funds designed to meet intrinsic social or environmental value objectives. For instance, "green" funds only invest in companies that are environmentally friendly. You can choose a mutual fund, then, that matches your specific values. Research and talk over your options with your financial advisors and carefully read through the prospectus before making an investment. A well-chosen mutual fund is often a smart way for anyone to begin investing, regardless of your Life Values Profile scores.

When you buy into a mutual fund, you buy a number of shares. Much as a stock share represents a percentage ownership in a corporation, a mutual fund share represents a percentage ownership in the entire fund. Many funds require initial investments of only $500. After your initial purchase, once you've become a shareholder, most will accept smaller amounts, allowing you to increase your investment. If you want to sell your shares, the fund is required to buy them back, making mutual funds easy to liquidate.

Some mutual funds charge a fee when you purchase shares. This charge is called a "load." Although loads vary greatly, a 5.75% load fee is not uncommon. That means if you had $1,000 to invest in a mutual fund that had a load of 5.75%, $57.50 would be deducted as a sales charge, leaving you with $942.50 to invest. Many funds do not charge an upfront sales fee. These are known as "no load" funds. Some funds have deferred loads, which means a fee will be deducted from your account if you redeem your shares before a specified period of time.

You may be tempted to think that the fee structure of a fund is tied in to how the fund performs, for example, pay more, get more. Not so. There is no evidence that load or deferred-load funds are better investments than no-load funds. But it is important to look at what the fee structure is, as the same concept applies to mutual funds as to stocks—repeated buying and selling of mutual fund shares can cause you to pay repeated fees (and tax on gains) that can sap your earnings potential.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020