Economics for Kids - Investments, Stocks, Bonds, Mutual Funds - Games, Activities, Free Use K-12 Lesson Plans for Teachers - FREE Lesson Plans, PowerPoints, Games, Activities (K-12)

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Stocks, Bonds, and Mutual Funds. How are they different?

Making investments can help you reach financial goals. You can invest in anything really, like gold, or art, or stocks, bonds, or mutual funds. I'm pretty sure you know what gold is and what art is, so let's take a quick look at the difference between stocks, bonds, and mutual funds.

Stocks: When you buy a share of stock, what you are buying is a piece of a company. You become a stock holder. If the company does well, their stock will go up and your share will be more valuable. If it goes down, your share will be less valuable. If they get sued, you are not sued, but your stock could be less or more valuable. Buying stock is a risk. But it's also a great way to build wealth. You can begin buying stocks in minutes with just a little bit of money to invest.

Bonds: Bonds are nothing more than an IOU that's been issued by a government or corporation. You are the lender. You are giving them money. To encourage you to buy their bonds, companies offer to pay you back with interest after a certain amount of time. If they default or go bankrupt, you will lose your investment or at least a portion of it. Although the interest rate is typically low, and you might have to wait several years to cash in, bonds are generally considered a safer investment than stocks. Especially safe is investing in US Savings Bonds as payment is backed by the US government.

Mutual Funds: Think of a basket that holds a mix of different investments including stocks, bonds, and others. There are thousands of investments to choose from. Companies put together a mix and offer you a chance to buy into their mutual fund, but reserve the right to change the items in their mix at any time to adjust for the best deals in their opinion. Mutual funds allow you to diversify your money, and allow professional investors to pick and choose what is in the fund at any one time.

How do you know which investment is right for you? There are risks in investing in anything. Bonds typically have the lowest risk, stocks the highest, and mutual funds are somewhere in the middle, but you can make money or lose money on any investment. It's important to be as knowledgeable as possible before you invest, and to decide how much of a risk you want to take.