Money Basics · Lesson 4 of 14
Know the Difference Between Stocks, Bonds and Funds
Stocks are ownership, bonds are loans and funds are baskets. An account is only the container that holds them.
In this lesson
- Describe what a stock, a bond and a dividend are
- Compare ETFs, mutual funds and index funds
- Explain why an account isn’t the same thing as an investment
Before you compare returns, know what you’d actually own. Most beginner portfolios are built from three kinds of building blocks.
Three building blocks
- Stock — a share of ownership in a company. Its price can rise or fall, and shareholders can lose their investment. A dividend is a payment a company may make to shareholders, and it can be reduced or stopped.
- Bond — a loan to a government or organization. Interest payments and repayment depend on the borrower meeting its obligations. Bonds can lose value, including when interest rates rise or the borrower becomes less likely to repay.
- Fund — a pool of many investors’ money that holds a collection of assets.
Kinds of funds
- An ETF holds a collection of assets and trades on an exchange throughout the day, like a stock.
- A mutual fund also pools investors’ money, but it generally processes purchases and redemptions at a price calculated after the market closes.
- An index measures a group of investments, such as the large U.S. companies in the S&P 500. An index fund tries to follow a particular index.
Example Consider this example
Buying one company’s stock is like relying on one business for an outcome. A broad stock fund can spread your money across many businesses. A fund that owns only one industry can still be highly concentrated.
An account is a container
An account is a container, not an investment. Opening a brokerage or retirement account doesn’t automatically mean its cash is invested. Account rules, withdrawal restrictions and tax treatment can differ, so read them before you choose where to hold an investment.
Check your understanding
3 questions. Answer each one, then open “Show answer” to compare.
Show answer
Answer: B. A bond
A bond is a loan. You’re paid interest and repaid only if the borrower meets its obligations, so a bond can still lose value.
Show answer
Answer: C. After the market closes that day
Mutual funds generally process orders at a price calculated after the market closes. ETFs, by contrast, trade throughout the day like stocks.
Show answer
Answer: False.
An account is a container. The deposit usually sits as cash until you buy something with it.
Key takeaways
- A stock is ownership, a bond is a loan and a fund is a basket, and all three can lose value.
- ETFs trade throughout the day; mutual funds generally price after the close.
- A fund concentrated in one industry can still carry a lot of risk.
- An account holds investments; it isn’t one.
Try it in StratosHedge
Add one broad index fund such as SPY and one single company to a Watchlist, then compare their daily moves over a few weeks. Notice which one swings more when company news comes out. Prices on Free are delayed.
Compare a fund and a stock Needs: Free account
Key terms
- Stock (share)
- A unit of ownership in a company. Its price moves as buyers and sellers trade it on exchanges.
- Dividend
- A payment a company may make to its shareholders, often quarterly. It isn’t promised and can be reduced or stopped.
- Bond
- A loan to a government or company that usually pays interest and repays the amount borrowed at maturity, if the borrower meets its obligations. Bonds can lose value.
- ETF (exchange-traded fund)
- A fund that holds a basket of assets and trades on an exchange like a single stock. SPY, for example, tracks the S&P 500.
- Mutual fund
- A fund that pools investors’ money. Purchases and redemptions are generally processed at a price calculated after the market closes, unlike an ETF, which trades all day.
- Index
- A rule-based basket that measures a slice of the market, such as the S&P 500. You can’t buy an index directly, but funds and options track it.
- Index fund
- A fund that tries to follow a particular index, such as the S&P 500, instead of having a manager pick investments. It can be a mutual fund or an ETF.
Sources and further reading
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Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.
Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)