Most mutual funds are invested in stocks, bonds or the short term variations of bonds. Investing in bonds and stocks is a great way to diversity your investment portfolio, as it offers one of the highest rate of return.
Shares in the company represent ownership of the firm. Most of these shares come under the category of common or preferred stocks. An investor assumes total responsibility of the shares when he/she is investing.
If the stock market crashes, the stocks will lose their entire value and the investor will not be compensated in any way. But normally if the economic conditions of the country remains well and the company keeps on progressing forward, the stock broker keeps on earning reasonable amount of profit monthly.
Bonds are ‘debt securities’ which are used by corporations to borrow money. Governments in a lot of countries also issues bonds against which they borrow money from local banks. Unlike stocks, there is little or no risk involved with these bonds as they pay a fixed amount of interest to the investors. However, unlike a normal bank account, the investor cannot take the money out of a security bond till it matures completely, or he/she will lose all profit on it.
Common stock gives the investor some control in the affairs of the company as they offer voting rights to them at the stake holders’ meeting. Common stocks of all big companies are traded in the stock markets. Stocks of some smaller corporations may also be traded via brokers in the ‘over the counter’ securities market.
They are a mixture of common stocks and bonds, giving shares to the investor but not letting them have any say in the running of the company. Dividends against a preferred stock are paid before the common stocks so they are a popular choice for investors looking to make money.
Companies sometimes earn money by issuing bonds to borrow money instead of selling their shares. They have a fixed rate of return associated with them.