When you buy stock, you are actually buying a tiny piece of ownership of that company, aka equity shares. How much your investment grows depends on the success of the company. If it does well, the value of your shares of stock will grow.

Stocks offer two ways to earn money:

Dividends – when a company is thriving, they may share some of their profits with shareholders by paying them a dividend. You can take the cash or reinvest your dividend in more shares of company stock.

Capital gains – when the value of your stock becomes greater than the price you paid for it, you can sell your shares and make a profit.

The stock market, as you know, cycles from strength to weakness and back, taking the value of your investments along for the ride. And as the stock market goes down, the value of other types of investments might rise. That’s why experts extol the wisdom of diversifying your portfolio (aka asset allocation.) And that’s where these next categories come in.

Unlike owning tiny shares of a company, a bond is a loan that you make to the government, a corporation, municipality, or other entity. A bond’s interest rate is set at its issue, and does not change. In exchange for your loan, you receive regular interest payments for a specific length of time, plus repayment of your principal when the bond matures. Although considered more secure than stock, bonds do come with risks. You can lose money if you sell any type of bond before it matures. Also, bonds are rated as to their risk level, from AAA (high grade) to BB and below (speculative or junk bonds) which could end in default.

Here are some bond scenarios:

• Pay par – a new bond is issued and you pay full face value (par), because it offers you a very competitive interest rate over its term (eg, 10, 20 or 30 years.) So you collect the interest and at maturity you are repaid your original investment.
• Pay below par – interest rates have risen since the bond was first issued, so it’s not as tempting for investors. To compensate for the reduced interest income, you are offered a lower-than-face-value purchase price. In other words, the bond goes ‘on sale.’ At maturity, you receive the full face value.  Plus you get whatever interest income was earned along the way.
• Pay premium – interest rates go in reverse: the bond’s issue rate is higher than what is currently available. So you are willing to pay higher-than-face-value in order to get that higher interest. You’ll only get the face value when the bond matures, but theoretically the interest you enjoyed along the way will more than make up for it, making it a good investment.

US Treasury Securities are considered the safest bonds. Some of the many other types include mortgage-backed and international.

Ever hear the expression ‘don’t put all your eggs in one basket?’ A mutual fund is the best way to avoid that. It is a collection of stocks, bonds and other securities, which are bought and sold by a fund manager. When you invest, you are buying a small share of the entire fund, rather than owning a piece of every security within that fund. Mutual funds can hold hundreds or more stocks or bonds, so they are highly diversified investments. This helps reduce market risk, because if some of the stocks go down, others in the fund will hopefully go up, compensating for any loss. So how do you know how much a share is worth? By calculating the net asset value (NAV) of all the different securities in the fund divided by the number of shares. Mutual fund shares are traded constantly throughout the day, but their prices are adjusted at the end of each business day.

Here are the advantages of mutual funds:

• Diversification – with a small investment, you can have access to tons of different securities.
• Simplicity – it’s an easy way to acquire a whole portfolio of different stocks and bonds, with basically no knowledge needed.
• Effortless – no need to follow the market, analyze trends or make buy/sell decisions. Your fund’s professional manager does it all for you.
• Access – many funds focus on specific areas of the market, such as tech, pharma, social media, etc. These ‘sector funds’ enable you to pick and choose the asset types you prefer to invest in.

Rather than having a manager buying and selling individual stocks and bonds, this type of mutual fund has a portfolio that matches a particular market index, such as the S & P 500. In other words, Standard & Poor selected 500 stocks that represent the overall market. This ‘index’ is watched to reflect the condition of the market. So an S & P index fund would duplicate those same 500 stocks. A Dow Jones Industrial Average fund would consist of the same 30 large US stocks that are included in that portfolio. Index funds enable investors to access the stock market’s potential without having to choose individual stocks. And they don’t require the ‘hands-on’ management of mutual funds, so they have lower fees.

ETFs have become the investment of choice for millennials. This is a type of mutual fund, consisting of a ‘basket’ of hundreds or even thousands of stocks or bonds. But it is traded like an individual stock, and its value can rise and fall throughout the day. Most ETFs are index funds, tracking the companies of a particular index. But there are also ETFs that use non-traditional indexes, as well as ones that reflect specific market sectors. ETFs aim to track an index, not outperform it. This ‘passive management’ requires only minor activity. And rather than depending on a savvy manager to grow your investment, an ETF enables you to grow via the power of the market itself. With lower costs, tax advantages, and low investment requirements, it’s no wonder millennials accounted for more than half of all ETF investors last year.