Five minutes to understand the differences among stocks, bonds, and funds


What is a stock?

A stock is a document of ownership of a business and it symbolizes equity (rights and interests). Owning a company’s stock is equivalent to owning a part of the company and can share the dividends brought by the company’s development and growth. Each listed company has its corresponding stock.


Trading in the stock market is actually a transaction of this ownership, and the transaction generates the price of the stock. A company’s management capability, profitability, future development potential, etc. jointly determine the price of its stock. However, due to information asymmetry, the stock price of a company will be impacted by factors, such as funds, and thus deviate from its reasonable and correct value in the short term. The goal of investing in stocks is to buy stocks at a reasonable or undervalued price after thorough professional research, share the dividends of the company’s development, and gain asset appreciation! When the stock price is too overvalued or the fundamentals of the company have changed significantly, it can also be sold to lock in profits.


What is a bond?


Bonds are marketable securities issued by debtors, such as governments, enterprises, banks, and other debtors in accordance with legal procedures to raise funds and promise creditors to repay the principal and interest on a specified date. Bonds can be compared to deposits, which are promises made by the bank to repay the principal and interest. Bonds are promises made by companies and governments. Obviously, the company’s commitment is more risky than the bank’s, but high risk means high yield, so the bond’s interest is higher. But because bonds can be traded like stocks, they have a price. If the bond is not held to maturity, the yield also depends on the price at which the bond is bought and sold. The price of bonds is determined by factors, such as the interest rate at that time and the qualifications of the issuer. For example, if the interest rate falls, the bond price will rise, and if the interest rate rises, the bond price will fall; the risks of different enterprises are different, and the risk of state-owned enterprises is lower than that of private enterprises. The judgment of interest rates and the research on the risk of bond issuers all require professional researchers to analyze. However, in addition to treasury bonds and reverse repurchase bonds, individual investment is less involved, and institutions are generally more involved.


What is a fund?

Once you understand stocks and bonds, it very easy to understand funds. A fund is a portfolio of stocks and bonds that is analyzed and managed by professional investment researchers.


For example, a stock fund is a combination of different stocks; a bond fund is a combination of different bonds, and a hybrid fund is a combination of different stocks and different bonds. Professional investment managers will determine the weight of each stock and bond through careful research, and strive to bring investors a return that exceeds the market. As I said above, there are so many stocks and bonds that it is difficult for individual investors to cover everything. Therefore, I personally suggest that you who want to participate in the stock market should try your best to leave investment to professional fund managers. Otherwise, you will always follow the trend and listen to news based on your feelings, and will inevitably become leeks harvested by professional investors!