Stocks and Bonds — The Foundation
A stock (equity) represents fractional ownership of a company. When a company goes public (IPO — Initial Public Offering), it sells shares to raise capital. Shareholders own a proportional claim on the company's assets and earnings. Stocks generate returns through price appreciation (buying at $50, selling at $80 = $30 gain) and dividends (regular cash payments distributed from company profits, typically quarterly). The S&P 500 index has returned an average of approximately 10% per year over the past century, including dividends, making equities the highest long-term returning asset class available to retail investors. The risk: stock prices are volatile — they can fall 30–50% in a recession (as in 2008 and the 2020 pandemic) before recovering. A bond (debt instrument) is a loan made by the investor to a corporation or government. The issuer pays regular interest (coupon) and returns the principal at maturity. US Treasury bonds are the gold standard of safety — backed by the full faith and credit of the US government. Corporate bonds pay higher interest than Treasuries but carry credit risk (risk the company defaults). Bond prices move inversely to interest rates: when rates rise, existing bonds paying lower rates become less valuable, so their prices fall. Bonds are typically less volatile than stocks and provide portfolio stability, particularly for investors approaching retirement.