POST 10:MUTUAL FUNDS
PART 2
WHAT ARE STOCK FUNDS?
Stock funds invest primarily in stocks. A share of stock represents a unit of ownership in a company. If a company is successful, shareholders can profi t in two ways: the stock may increase in value, or the company can pass its profi ts to shareholders in the form of dividends. If a company fails, a shareholder can lose the entire value of his or her shares; however, a shareholder is not liable for the debts of the company. When you buy shares of a stock mutual fund, you essentially become a part owner of each of the securities in your fund’s portfolio. Stock investments have historically been a great source for increasing individual wealth, even though the stocks of the most successful companies may experience periodic declines in value. Over time, stocks historically have performed better than other investments in securities, such as bonds and money market instruments. Of course, there is no guarantee that this historical trend will be true in the future. That’s why stock funds are best used as long-term investments.
Stock Market Returns
The upswings and downturns of the stock market affect stock fund returns. Despite a history of outperforming other types of securities, stocks sometimes lose money (see chart below). Sometimes these losses can be substantial and last for long periods. The average annual return on stocks from 1926 to 2005 is about 10.4 percent
WHAT ARE BOND FUNDS?
Bond Funds Bond funds invest primarily in securities known as bonds. A bond is a type of security that resembles a loan. When a bond is purchased, money is lent to the company, municipality, or government agency that issued the bond. In exchange for the use of this money, the issuer promises to repay the amount loaned (the principal; also known as the face value of the bond) on a specific maturity date. In addition, the issuer typically promises to make periodic interest payments over the life of the loan. A bond fund share represents ownership in a pool of bonds and other securities comprising the fund’s portfolio. Although there have been past exceptions, bond funds tend to be less volatile than stock funds and often produce regular income. For these reasons, investors often use bond funds to diversify, provide a stream of income, or invest for intermediate-term goals. Like stock funds, bond funds have risks and can make or lose money.
PART 2
WHAT ARE STOCK FUNDS?
Stock funds invest primarily in stocks. A share of stock represents a unit of ownership in a company. If a company is successful, shareholders can profi t in two ways: the stock may increase in value, or the company can pass its profi ts to shareholders in the form of dividends. If a company fails, a shareholder can lose the entire value of his or her shares; however, a shareholder is not liable for the debts of the company. When you buy shares of a stock mutual fund, you essentially become a part owner of each of the securities in your fund’s portfolio. Stock investments have historically been a great source for increasing individual wealth, even though the stocks of the most successful companies may experience periodic declines in value. Over time, stocks historically have performed better than other investments in securities, such as bonds and money market instruments. Of course, there is no guarantee that this historical trend will be true in the future. That’s why stock funds are best used as long-term investments.
Stock Market Returns
The upswings and downturns of the stock market affect stock fund returns. Despite a history of outperforming other types of securities, stocks sometimes lose money (see chart below). Sometimes these losses can be substantial and last for long periods. The average annual return on stocks from 1926 to 2005 is about 10.4 percent
WHAT ARE BOND FUNDS?
Bond Funds Bond funds invest primarily in securities known as bonds. A bond is a type of security that resembles a loan. When a bond is purchased, money is lent to the company, municipality, or government agency that issued the bond. In exchange for the use of this money, the issuer promises to repay the amount loaned (the principal; also known as the face value of the bond) on a specific maturity date. In addition, the issuer typically promises to make periodic interest payments over the life of the loan. A bond fund share represents ownership in a pool of bonds and other securities comprising the fund’s portfolio. Although there have been past exceptions, bond funds tend to be less volatile than stock funds and often produce regular income. For these reasons, investors often use bond funds to diversify, provide a stream of income, or invest for intermediate-term goals. Like stock funds, bond funds have risks and can make or lose money.
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