Your portfolio is made up of assets. An asset is a tool used to make more money. Companies use assets like plants so they can produce widgets, land so they can raise crops, and wood, glass and marble so they can build hotels. You can also hold paper investments in your portfolio. They are not tangible, like land, but they can work to make more money.
Common investment assets include patents, real estate, stocks, bonds and derivatives. We’re going to focus on the paper investments but a diverse portfolio will include more than just paper investments.
Intro to the Markets
There are five major asset classes that most investors begin with when they first start investing. They are Stocks, Bonds, Options, Futures, and Forex.
Stocks and Bonds
A stock is a piece of ownership or a claim to future earnings for a business. When a company decides to expand operations or they find themselves in need of cash for their business, they have two basic ways of raising cash. They can issue stock or sell bonds. A bond is similar to a stock in that it is a claim to a portion of earnings but the rules, to how those earnings will be paid, are what distinguish a stock from a bond.
Equity
A stock is also commonly called equity. When you buy stock or equity in a company you become a stockholder and you are buying a piece of the future success or failure of that company. You become a part owner with the rest of the stockholders. A stock is also called a share, because you are sharing ownership. You have the right to vote on company decisions by either selling the stock if you disagree with their decisions or buying more shares if you agree. You also are given the right to vote on the management, the group of people that will oversee the company, but the details on how much voting power you have will differ from company to company. If the company has a great year or quarter and the stock price rises then you, as the stock holder will see an increase in your overall equity. However, if the company continually makes bad decisions you will see the earnings in your portfolio shrink.
Debt
A bond is a claim to a specific stream of income. A bondholder does not have the right to vote on company decisions the same way a shareholder does. They may decide to sell their bond but this will have little to no effect on the company. A bond is more like a contract. Some bond contracts include a periodic interest payment to the bondholder as long as they hold the bond and until the lump sum is paid back. These are called coupon bonds. Other bonds do not pay a periodic interest payment during the life of the bond and these are called zero-coupon bonds.
If the company has a great year and their stock price increases, the bond holder does not see any extra income because they are not a part owner of future earnings. They are only entitled to the specific stream of income that they were locked into when they purchased the bond. However, the bond holder is protected on the downside better than a stockholder would be if the company began to lose money. The stock price would see a drop, but the income stream from the bond would still stay the same, as long as the company stays in business.
Do you use stocks and bonds in your portfolio?
Loading tweets...
12 comments
5 pings
krantcents says:
January 13, 2012 at 1:30 pm (UTC -4 )
I have stocks, mutual funds and ETFs. A portion of my portfolio is in fixed income (TIPS). Any investment that has dividends or capital gains is reinvested to buy more shares.
LaTisha Styles says:
January 14, 2012 at 9:19 am (UTC -4 )
That seems like a pretty solid portfolio. Good diversification of risk into the various funds.
Jon -- Free Money Wisdom says:
January 13, 2012 at 5:56 pm (UTC -4 )
This is such a great elementary blog post for those just starting their portfolio! Awesome job and interesting refresher.
LaTisha Styles says:
January 14, 2012 at 9:19 am (UTC -4 )
Thanks Jon! I try to make investing fun and easy
World of Finance says:
January 13, 2012 at 9:05 pm (UTC -4 )
Great job explaining stocks and bonds.
LaTisha Styles says:
January 14, 2012 at 9:20 am (UTC -4 )
Thanks Mary!
Robert @ The College Investor says:
January 14, 2012 at 11:09 am (UTC -4 )
I use both stocks, bond funds, and other investments in my portfolio!
Jackie says:
January 14, 2012 at 12:30 pm (UTC -4 )
Yes, I have stocks & bonds in my portfolio. I think real estate should be a part of it too, but so far I only have a REIT (except for our house.) I want to add some rental property.
Juan says:
January 14, 2012 at 12:36 pm (UTC -4 )
Foreign bonds are also a good idea to check out if one wants to diversify from a given currency.
Invest It Wisely says:
January 14, 2012 at 5:51 pm (UTC -4 )
I barely have any bonds in my portfolio as I am too young and I consider that too much money has plowed into them out of fear. I have equities, cash and precious metals, and hopefully can build myself and a business up as an asset as well.
Moneycone says:
January 15, 2012 at 8:18 am (UTC -4 )
I’m loving your back-to-the-basics posts LaTisha!
American Debt Project says:
January 15, 2012 at 11:21 pm (UTC -4 )
I need all the back to basics I can get! Even though I know all of this stuff it’s like a language…if you don’t practice it you lose it! I’m working on the 10% saving myself, I think it’s hard to start but once you get going you really do have momentum!
Sublime Saturday Assemblage #18 | Master the Art of Saving says:
January 14, 2012 at 7:03 am (UTC -4 )
[...] to Volunteer More at Prairie EcoThrifter ♦ Underestimating Your Returns at Money Reasons ♦ What is a Portfolio? at Financial Success for Young Adults Cancel [...]
Carnival of Financial Planning – Edition #220 – January 20, 2012 | Credit, Eh - The Credit Card & Personal Finance Blog of CreditCardsCanada.ca says:
January 20, 2012 at 11:57 am (UTC -4 )
[...] LaTisha presents What is a Portfolio? posted at Financial Success for Young Adults, saying, "A portfolio is made up of assets. There are five major asset classes of intangible financial instruments; Stocks, Bonds, Options, Futures, and Foreign exchange." [...]
Little House in the Valley - Saving with a Plan says:
January 22, 2012 at 8:05 am (UTC -4 )
[...] Success for Young Adults : What is a Portfolio? – A portfolio is made up of assets. There are five major asset classes of intangible [...]
Carnival of Retirement – 3rd Edition - 20's Finances | 20's Finances says:
January 23, 2012 at 5:04 am (UTC -4 )
[...] from Financial Success for Young Adults published What is a Portfolio?, saying, ‘A portfolio is made up of assets. There are five major asset classes of intangible [...]
TotallyMoney Blog Carnival #51 - TotallyMoney says:
January 23, 2012 at 5:27 am (UTC -4 )
[...] Financial Success for Young Adults helps explain what a portfolio is. [...]