Chapter Three Know What You’re Buying: Part One: Stocks and Bonds
Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
—Warren Buffett
Before we start on our investing journey, we need to know something about the various mainstream investment options that are available to us. In this chapter, we’ll learn about stocks, bonds, mutual funds, funds-of-funds, exchange-traded funds (ETFs), and annuities.
Although you may never choose to invest in an individual stock or bond, if it’s your intention to invest in mutual funds, you still should have an understanding of the underlying investments that are in your mutual funds. Therefore, we’ll try to cover some of the various products you can invest in directly, as well as investment options that are probably best left to investing via mutual funds. We’re somewhat biased, of course, and feel that mutual fund investing is the best route for most investors in most situations. (Notice we did not say all investors or all the time!)
Because bonds and bond funds seem to be one of the least understood investment options, we’ll spend a lot of time on that subject. We’ll try not to get too technical, but hopefully we’ll cover the subject in enough detail to make you comfortable with your investment decisions.
STOCKS
Stocks represent an ownership interest in a corporation. When a company issues stock, it’s actually selling a small fractional share of its business to each person who purchases shares of ...
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