Did you know that over 20 billionaires started out with nothing (Bloomberg, 2010)? So how did they each turn the tables around to become one of the wealthiest people in the world? One answer is through investments. Investment is the action of putting money into something to make a profit. There are many different types of investments, but there are three specific types that most people talk about; stocks, mutual funds, and bonds.
What exactly is the difference between the three different types of investments?
Stocks are shares of ownership of a certain company. When people talk about stock, often you hear Wall Street mentioned. Wall Street is known as the financial district and is the home to the world’s two largest stock exchanges. A stock exchange is a market where securities like stocks, bonds, and options are bought and sold. Stocks are oftentimes riskier, but there’s a chance of a high return. According to Investopedia, if you had purchased $100 in Apple stocks at the beginning of 2002, the value of your stock would’ve been $5,000 by 2016 which is 50 times the original investment. In other words, you would’ve made $4,900 through a stock investment which could get you a used car BUT stock prices can also go down.
Investing, especially in one individual stock, is risky! A mutual fund is a portfolio of stocks from different companies. Mutual funds are usually less risky than purchasing individual stocks due to their diverse portfolio. A diverse portfolio is a mixture of stocks from different industries. By having a wide variety of stocks, a mutual fund reduces the risk of the investment. For example, a farmer who only grows apples operates at a higher risk compared to a farmer who grows apples, bananas, and pears when the market for apples decreases. According to Zac Brown, a Principal and Portfolio Manager at Milliman, a mutual fund is a good investment to consider, not only for beginners who just started investing but also advanced investors like him.
Bonds are basically loans that must be repaid over time. Bonds have the least risk out of the three because the money is required to be paid back. At the same time, bonds will have a lower return compared to the other two investments. There are few keywords that will help you understand bonds. Those are bond principal, maturity date, and interest rate. The principal is the total balance that was loaned out to the borrower. An interest rate is set at a certain percentage and that is the amount the borrower must return along with the principal.
Lastly, the maturity date is the day in which the bond has to be fully returned. Stocks, mutual funds, and bonds are all investing options. As a youth, investing might sound scary, but it could be interesting and it could even lead you to a career field to go into. There are lots of investing apps that youths can use to try and to learn how to invest. For example, Rapunzl is a mobile app that is easy to use and helps teach youth how to invest. The app provides you with an imaginary ten thousand dollars to invest in any stocks, and it shows the real-time market so you can form your own stock portfolio.
There are many ways to start investing and starting early may get you closer to become a millionaire or even a billionaire!