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Understanding Investments Frequently Asked Questions

What's the difference between a stock and a share?

“Shares” are the ownership certificates of a specific company — so you might say you have 50 shares of Facebook. Owning stock, on the other hand, is a more general term that means you own a number of shares in a company or multiple companies. For example, if you own shares of Facebook and Google, you own tech stock.

But really, this is just semantics. People often use the terms interchangeably.

Whether you call it a “share,” “equity,” or “stock,” it means the same thing: You have some ownership in a company’s assets and earnings.

What's a bond?

Bonds are issued by companies, states and governments (in both the U.S. and abroad) to help finance various projects. For example, if an airline wants to buy a bunch of new planes, they might issue bonds to borrow money from investors in the market (like you). An investor who buys a bond loans money to the corporation or government for a set time at a fixed interest rate. This rate is determined by a number of factors, like what’s going on in the economy and how risky it is to be lending to the company or government.

In general, a bond is a more conservative investment than a stock, so bonds are often used to offset stock investments. Stocks tend to be riskier because their value is more likely to bounce up and down depending on the day.

Stocks tend to be riskier because their value is more likely to bounce up and down depending on the day.

If investors are worried about being paid back, they’ll want to be compensated for taking on that risk with a higher interest rate. If the entity who puts out the bond is unable to pay back its creditors (like you), they will default and you may not get your money back. The company will likely declare bankruptcy and the company’s assets will be liquidated in order to pay back its creditors, but there may not be enough cash to go around. Some investors might be out of luck.

What does risk mean?

When you invest in the stock market, you’re accepting some risk because we can never know exactly how well a company will perform. Maybe the companies you are investing in will outperform expectations and you’ll get more money than you were hoping for. Then again, maybe their valuations will tank and you’ll lose some of your investment.

An investment of any kind is all about balancing risk and reward. In general, riskier bets come with more potential for upside, but this also can mean things could go the other direction as well, resulting in a loss. On the flip side, a more conservative approach — like bonds  — limits both the potential for upside and downside, and results in a much smoother ride.

What's a mutual fund?

A mutual fund is a pool of investments created by a money manager, who places money in various stocks, bonds and other investments, like real estate or natural resources. This is really no different from a group of friends deciding to pool their money to buy something they couldn’t each afford on their own. Anyone can invest in a mutual fund. Rather than buying one share of Apple stock, you could invest in one share of a fund that invests in a much larger portfolio of U.S. companies, and still get a little piece of Apple.

What's an ETF?

Exchange-traded funds, better known as ETFs, work similarly to mutual funds, but their up-front and ongoing investing fees are generally lower. One reason for this is that most ETFs simply track an index, which is basically a chunk of the stock market. It’s a lot less work to replicate an investment strategy that essentially already exists inside the index. On the other hand, many mutual funds try to create a strategy that’s meant to beat the market.

Is there a minimum investment?

Generally speaking, there are no minimums. But if you decide you want to start investing, you’ll need an investment account at a brokerage firm. (Some of these require a minimum balance to get started; others don’t.)

How much does it cost to buy stocks?

The short answer: It depends. Many investment firms require you to pay a transaction fee for purchasing a stock, mutual fund or ETF. The fee for each can vary based on the firm where your account is held, how much of a particular investment you are buying and the size of your investment account. You will also likely pay a similar transaction fee if you decide to sell the investment.

Along with the one-time transaction costs, mutual funds and ETFs also have ongoing fees called expense ratios, where you pay an annual percentage. For example, if you want to invest $1,000 in a mutual fund that has a 0.5 percent expense ratio, you will pay $5 over the course of the year. Aim to keep expense ratios below 1 percent.

What happens if I want my money back?

You always have the option to sell your investments and transfer the proceeds out of your investment account. It’s important to remember, though, that there will likely be tax consequences for doing so.

Aside from the tax considerations, there is also the chance that the value of your investment is temporarily down

Aside from the tax considerations, there is also the chance that the value of your investment is temporarily down. Short-term price fluctuations are common when investing, but if you choose to sell at that moment, you lock in those losses rather than holding the investment with the hope that the price will rebound. Take a close look at your shares’ value before you decide whether to pull the trigger.