How Stocks, Bonds, and Funds Work
- Written by Candice Elliott
We’ll discuss a boring subject, how stocks, bonds, and funds work but make it less boring by using Arrested Development to illustrate our points!
Recently, we published a post called, An Illustrated Guide to Investment Types. Before writing, Matt asked Andrew to explain to him how stocks and bonds are born. Andrew knows that Matt’s favorite show is Arrested Development, so he put it in terms Matt could understand: the Banana Stand.
He described the whole scenario using characters and businesses from Arrested Development. For those familiar with the show, this will make things clear and fun to learn. For non-fans, it’s still useful in its simplicity.
Stocks: You have a company that you own 100%. But you want some money to expand. So you sell some stock. An investor gives you money and you give them some ownership of the company.
Bonds: Bonds are another way to raise money. It’s a debt investment. Investors loan money for a set period of time at a fixed interest rate. The bulk of the money comes at the end of the set time period. Bonds are a very safe investment.
Funds: Funds are bundles of stocks. You get a variety which is important because you want to be diversified. Mutual funds are chosen by a person or people and index funds are chosen by a computer. Index funds are usually cheaper than mutual funds.
CD: A certificate of deposit works like a bond but you make even less money. It’s the bank’s way of screwing you slightly less than if the money were in a savings account.
Hope this explained things and you enjoyed the infographic!
Betterment: The easy way to invest.