Money Wise Mom

This Investing ABCs series is for anyone who wants to start investing, but doesn’t know the first thing about how to begin. You don’t need to read this series in order, but you should read and learn all the ABCs before venturing forth to buy investment products.

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Never do anything with your money that you don’t understand. This is easy to say, but tricky to achieve because when you are just getting starting, you don’t even know what you don’t know, ya know?

One big barrier to taking control of your money is that you will need to learn a few new words and some new concepts. In today’s post, I’ll explain four common types of investment products that you likely have already heard about but may not understand what they exactly are or how they exactly work.

Stocks, Bonds, ETFs, and Index Funds.

These are not the only investment products you can buy; we will start with these four and I promise to talk about even more types of investment products in a future post.

The Two Building Blocks: Stocks vs. Bonds

Stocks and Bonds are the two most basic assets types in investing.

1. Stocks (Ownership)

When you buy a stock, you are buying a slice of ownership in a specific company. Companies sell their stocks on a stock exchange in order to raise funds for their business operations. With those funds, the company wants to grows its revenue either directly (by selling stuff) or by innovating (by promising something cool in the future). When they are successful, the value of each stock increases and you may receive cash payouts called dividends. However, if the company fails or runs into trouble, your share value drops. Buying a stock is like buying one specific apartment in a city. If the neighbourhood booms, your property value soars. If the building falls into disrepair, you take the loss.

IMHO, buying individual stocks is gambling and should be avoided. I would only buy an individual stock if I had “play” money that I didn’t care about losing. Understanding stocks and how they work is still very important (more on that below). However, you want your path to growing wealth to be as boring and and predictable as possible. No one has a crystal ball and nothing in investing is guaranteed, but we can make smart decisions and grow our wealth with relativity low risk.

2. Bonds (Loans)

Governments and corporations sell bonds to borrow money from investors. When you buy a bond, you are lending them money. They will use your money to fund public projects, bridge budget deficits, expand operations, or refinance existing debts. Bonds are a promise to pay back the loan at a later date. As the lender, the borrower promises to pay you regular interest over a set period and return your original principal once the bond matures. Bonds generally offer lower returns than stocks, but they are much less volatile. Buying a bond is like acting as a money lender. You don’t own a physical asset, you are lending money now to receive a steady, predictable mortgage payments from the borrower.

The Relationship & Strategy Between Stocks and Bonds

In an investors portfolio, stocks and bonds serve complementary roles.

• Stocks provide growth, but come with risk and volatility
  
• Bonds provide stability, they returns are more certain but no potential for extra growth

Historically, stocks and bonds move in opposite directions during market swings.

A classic investment strategy is to hold a mix of stocks and bonds. The percentage of stocks vs bonds is a personal choice, but a very common, middle of the road strategy, is to hold 60% stocks and 40% bonds in your portfolio. The higher your risk tolerance and the longer your time horizon, you might choose a higher percentage of stocks. Younger investors with decades ahead usually hold more stocks for maximum growth, while investors closer to retirement hold more bonds to preserve capital. You just don’t want to be “all in” on the stock market right before you need to pull money out. If the market has a crash (the real estate bubble, COVID, politics, an AI bubble) you either want time to ride it out until the market returns to “normal” or not to be holding more safe stuff so that you are not exposed to too much volatility.

The Bundles: ETFs and Index Funds

Buying individual stocks and bonds requires heavy research and carries high risk. If you put all your money into one company and it goes bankrupt, you lose everything.

Once upon a time, dealing with specific stocks and bonds directly was the only way to be a capital investor. But in our modern times, there is a much better option! Financial institutions have created bundled funds. Bundles now make it really easy for you, the investor, to own a fully diversified global portfolio, containing stocks and bonds from every major financial market, in just one fund. And, that fund can be extremely low cost to own. Check out my post on MER to understand why that’s kinda a big deal.

There a couple of different types of bundled funds that you should be aware of.

3. ETFs (Exchange-Traded Funds)

An ETF is actually a bundle of dozens, hundreds, or even thousands of individual stocks or bonds. When you buy one share of an ETF, you instantly gain exposure to every asset inside that basket. What makes an ETF unique is how it is bought and sold: it trades on a public exchange like an individual stock, meaning its price updates in real time throughout the trading day. However, instead of buying one unit of one company, you are buying one unit of thousands of companies. Buying an ETF is like buying an entire neighbourhood of apartment buildings in a city. If the neighbourhood booms, your property value soars. But if only one apartment stays empty, you will have thousands of other apartments still making you income. ETFs smooths out the risk of buying individual stocks because each unit’s value is linked to the success of many companies, not just one.

4. Index Funds

An index fund is an investment strategy designed to track a specific slice of the market (an “index”) rather than trying to pick winning investments. For example, an S&P 500 index fund simply buys shares in the 500 largest publicly traded companies in the United States.

Here is where beginners often get confused: An index fund describes what the fund does (tracks a market index), while an ETF describes how it is traded. You can buy an index fund structured as a mutual fund (which trades once per day at market close) or structured as an ETF (which trades continuously throughout the day).

Investment Type	What Is It?	Primary Goal	Trading Style
Stock	Single company ownership	High growth potential	Real-time during market hours
Bond	Loan to a company or government	Capital preservation & regular income	Variable / Over-the-counter
ETF	A bundled basket of investments	Instant diversification	Real-time on stock exchanges
Index Fund	A fund tracking a market benchmark	Matching broad market returns at low cost	Once daily (Mutual Fund) or real-time (ETF)

3 Key Takeaways

1. Individual assets do different jobs: Stocks offer wealth growth but come with high volatility; bonds offer predictable income and stability during market downturns.
   
2. Diversification beats stock-picking: Buying individual stocks is risky. Broad-market ETFs and index funds allow you to own hundreds of companies simultaneously, spreading out your risk.
   
3. Keep fees low and stay long-term: Passive index ETFs generally charge tiny fraction-of-a-percent management fees compared to traditional actively managed funds. Keeping management costs low ensures more of your money compounds over time.