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  • Mark Fonville, CFP®

Bonds vs Stocks vs Mutual Funds: What You Need to Know

Bonds, Stocks, and Mutual Funds

Everyone knows you shouldn’t keep all your eggs in one basket. Right?

This is especially true when it comes to investing. But, its important to understand the difference between bonds vs. stocks vs. mutual funds if you want to preserve and grow wealth.

When you’re investing for retirement and other life goals, it’s important to have different types of investments to achieve the returns you need to reach your goals.

Bonds, stocks, and mutual funds are powerful components of a well diversified portfolio. That’s why it’s important to understand what these investments are and how they differ.

Download our essential guide on 401(k) rollovers for more helpful tips and considerations on growing and preserving wealth.

Let's start by understanding the difference between stocks and bonds. Then you'll learn how mutual funds come into play.

What are bonds?

Bonds are investments designed to help governments or corporations raise money to finance projects. They can be viewed as a loan to investors. The investor does not receive stock ownership in the company, but they do receive an interest payment.

Example: Apple needs to raise $10 million to build more computers. They decide to offer a 5 year bond to investors to raise the money. You purchase the bond at the issue price and Apple pays you interest on the money paid for the bond. After the bond matures, Apple pays you back the value upon maturity, known as the face value.

Bonds are “fixed income” assets, which means they pay interest at regular intervals until they reach maturity. They’re called fixed income because the amount of the interest payments are fixed in advance. When you buy a bond, you’re basically making a loan to the issuer.

Stocks and bonds are conduits for capital

When you think of bonds vs stocks (we’ll explain mutual funds a bit later), bonds are usually considered the safest of the two assets. Bonds are safer because corporations are required by law to pay back bond investors before stock investors in the event of bankruptcy. But that doesn’t make bonds risk free.

Bonds are rated for credit quality by a credit rating agency such as Moody’s or Standard and Poor’s to help investors gauge their risk. Investment-grade bonds typically have a rating of A, AA, or AAA.

Eight bond terms to know

8 bond terms to know

Types of bonds

Bond issuers can be cities and states (municipal bonds), the US Treasury (government bonds), or government-affiliated organizations such as the FHA or SBA (agency bonds). When governments and government agencies need to raise money to finance debt, they can only issue bonds, which is a unique characteristic of bonds vs stocks vs mutual funds.

Businesses also issue bonds (corporate bonds) instead of seeking a loan from a bank. Doing so is usually cheaper because the bond market has lower interest rates and better terms in many cases.

How much do you actually pay for bonds?