What even is a stock? What about a bond?
Let’s start with one general rule: Don’t put all your eggs in one basket! 🧺
Spreading your money across different assets can help reduce some of your investment risk. Then fingers crossed, any losses will be offset by your gains and your portfolio will grow over time. This is what is known as building a diversified portfolio.
But let’s get more specific. What can you actually buy? Let’s start working towards building a balanced portfolio!
Let’s kick off with stocks (also known as shares or equities). Owning a stock means you own a very small part of a company and may get a portion of the company’s profit paid to you periodically as a dividend. 💰
Stocks are often lumped together to make an index, some of which have become very famous over the years. For example, the Dow Jones Industrial Average aims to show the average performance of 30 top American stocks.
When people talk about “the stock market” being up or down, they’re generally talking about the performance of an index like this. 📈
As well as buying a company’s stock, you can also buy a company’s bonds. By purchasing a company’s bonds, you own a small part of its debt – which means you are effectively lending that company money. 💸
Bonds are generally considered safer investments than stocks because if a company goes bankrupt, its equity will generally be worth zero, but its debt might still have some value.
In addition to purchasing bonds in a company (known as corporate bonds), you can also buy a government’s 🏛️ bonds. In essence, you are lending money to a government to support its spending.
Next on the list of potential investments we have commodities. That’s stuff like gold, copper – or even agricultural products like soybeans and orange juice.
Finally, one group of alternative investments that has both a real-world utility and, compared to others, comparatively low risk is real estate – or property. 🏘️
The property market has shown a historically stable upward trend, however, as always, past performance is not a guarantee of future performance.
Property investments tend to be considered more “slow 🐌 and stable” because apartments and office blocks aren’t directly traded on an exchange (even if big property-owning companies can be). This helps insulate real estate from daily swings in value.
It’s also worth mentioning cryptocurrencies. Financial regulators can’t agree whether bitcoin and these other digital tokens are currencies, stock-type investments or even commodities.
Their prices can swing wildly, making them risky investments, but there has been growing interest in the sector recently. Keep in mind that the crypto market is still not regulated 🎓 by the FCA in the UK.
You can track the price of many of the previously mentioned assets, stocks, bonds, commodities and even real estate by using exchange-traded funds (or ETFs). These are an easy, low-fee way to buy and sell, say, the entire US stock market without actually having to buy lots of individual shares of companies in the US.
At this point, we have to stress out that, as with all investments, their value may go up as well as down and therefore you should not invest more than you can afford to lose.
In our fifth and final session, we’ll talk you through the steps you can take to get invested.
Keep in mind that when you invest, your capital is at risk.