Lesson 1 of 4 · 2 minute read
Investing basics: stocks, bonds, and index funds
What investing is, the main things you can invest in, and when to start.
Saving means keeping money safe. Investing means putting money into something that can grow over time, but can also go down.
The main types
- StockA small piece of ownership in a company. Its price goes up and down with how the company and the market are doing.More in the glossary are small pieces of companies. They can grow a lot over many years, but their prices go up and down, sometimes a lot.
- BondA loan you make to a government or company. They pay you interest and pay you back later. Bonds usually go up and down less than stocks.More in the glossary are loans to governments or companies that pay you interest. They usually go up and down less than stocks, and usually grow less, too.
- Index fundA fund that buys a little of many stocks or bonds at once, to match a whole market. It spreads out your risk and usually has low fees.More in the glossary buy a little of many stocks or bonds at once. Owning hundreds of companies means one bad company can’t sink you. Most index funds also have low fees.
Time matters
Investments can drop in value, especially over months or a few years. Over long periods, like 10 or 20 years, there’s more time to recover from the drops. That’s why investing is best for money you won’t need for a long time, like retirement.
Start in the right order
- Build a small Emergency fundMoney set aside only for surprises, like a car repair or a medical bill, so you don't have to borrow.More in the glossary, so a surprise doesn’t force you to sell investments when they’re down.
- If your job offers an Employer matchMoney your employer adds to your retirement account when you save in it. It's free money, so try to save enough to get all of it.More in the glossary, put in enough to get all of it.
- Pay down high-interest debt, like credit cards.
- Then invest more for the long term.
Investing means putting money into something that can grow over time. But it can also go down.
StockA small piece of ownership in a company. Its price goes up and down with how the company and the market are doing.More in the glossary are small pieces of companies. Their prices go up and down, sometimes a lot. BondA loan you make to a government or company. They pay you interest and pay you back later. Bonds usually go up and down less than stocks.More in the glossary are loans that pay you interest. They usually move less and grow less.
An Index fundA fund that buys a little of many stocks or bonds at once, to match a whole market. It spreads out your risk and usually has low fees.More in the glossary buys a little of many stocks or bonds at once. One bad company can't sink you. Most have low fees, too.
Investments can drop, but over many years there is more time to recover. So invest money you won't need for a long time.
Go in order. First build a small emergency fund. Next, get your full employer match. Then pay down high-interest debt. After that, invest more.