Define and describe the investment characteristics of stocks, bonds, and mutual funds

Question

What will be an ideal response?

Answer 1

Stock is a share of ownership in a company. Investors can be individuals or institutions that become known as shareholders, and in return for the money they paid, they receive ownership interests in the company. When you own stock, you can make money in two ways. One way is if the value of that stock increases over time, you can sell the stock for more than you bought it for and the net difference will be income for you (although you will have to pay taxes on that income). You can also make money on a stock through dividends. A dividend is a payment that some corporations make on a regular basis to their shareholders. Not all corporations pay dividends, so you will need to research potential stocks you plan to purchase to determine if you'll be receiving dividends.
A bond is basically an agreement to lend to a company or government organization money that will be repaid at a later date. Companies and governments typically issue bonds in order to finance a venture, and investors in these bonds might be individuals or institutions. In return for lending the money, the individuals or institutions become creditors. As a result, they receive a promise that the company will repay them their money, with interest. The interest you earn from purchasing bonds is the income you receive from your investment. You also receive your entire original investment back at a specified future date. There are secured bonds, which are backed with collateral of some kind, and unsecured bonds, which are backed only by the company's promise and reputation. Bonds that yield a higher interest rate tend to be riskier, reflecting the tradeoff between risk and reward that occurs in investing.
Mutual funds are a pooled collection of investments, and individual investors can purchase shares of these funds. The benefit of a mutual fund is that you can acquire ownership in a much broader set of stocks, bonds, and other investments than you could if you were to purchase each of them separately. Mutual funds may drop in value just as much as they may increase in value, and there are typically fees that you have to pay to the mutual fund to cover the expenses of hiring money managers and analysts who decide which investments the mutual fund should purchase.