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WalletPrep worksheet · Investing

What is the difference between stocks and bonds?

Name ____________________ Date __________

Key ideas

  1. A stock is a small piece of ownership. Its price moves with the company and the market. Over long periods stocks have tended to grow more, with bigger drops.
  2. A bond is a loan that pays interest. You lend to a government or company, which pays interest and returns the money at the end. Prices move less than stocks.
  3. Rebalancing puts your mix back on target. In the example, Alex moves $714 from stocks to bonds to return to 70% stocks and 30% bonds.

Vocabulary

Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Time horizon
How long you plan to keep money invested before you need to spend it.
Rebalancing
Moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target.
Dividend
A payment a company makes to its shareholders out of its profits, usually in cash and often every 3 months.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.

Work it out

Alex, 35, has $20,000 invested at a target of 70% stocks and 30% bonds: $14,000 and $6,000. Assume stocks gain 20% and bonds 3% over the year.

  1. Stocks: $14,000 + 20%
  2. Bonds: $6,000 + 3%
  3. Total after one year
  4. Target stocks share
  5. Stocks now
  6. Stocks target, 70% of total
  7. Move from stocks to bonds

Check yourself

  1. What do you own when you buy a bond?

    • A. A share of a company
    • B. A loan that pays you interest
    • C. A savings account at a bank
    • D. A piece of an index

  2. Your target is 60% stocks. Your $10,000 portfolio now holds $6,800 in stocks. How much should you move to bonds?

    • A. $200
    • B. $600
    • C. $800
    • D. $1,800

  3. Who can usually hold the most in stocks?

    • A. Someone buying a house in 2 years
    • B. Someone retiring next year
    • C. Someone saving for retirement in 35 years

Your turn

Log in to your retirement account and write down how much is in stock funds and how much is in bond funds. Divide stocks by the total and compare it with the mix you want.

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Answer key

What is the difference between stocks and bonds?

Work it out

  1. Stocks: $14,000 + 20%$16,800
  2. Bonds: $6,000 + 3%$6,180
  3. Total after one year= $22,980
  4. Target stocks share70%
  5. Stocks now$16,800
  6. Stocks target, 70% of total− $16,086
  7. Move from stocks to bonds= $714
  1. Stocks grow to $14,000 × 1.20 = $16,800 and bonds to $6,000 × 1.03 = $6,180, for a total of $22,980.
  2. Stocks are now $16,800 ÷ $22,980 = 73% of the total. Alex's target is 70%, which is $22,980 × 70% = $16,086.
  3. Alex moves $16,800 − $16,086 = $714 into bonds. Bonds become $6,180 + $714 = $6,894, which is 30% of the total.
  4. The returns here are assumptions. In a year when stocks fall, the same steps move money from bonds back into stocks.

Check yourself

  1. B. A loan that pays you interest A bond is a loan to a government or company. It pays interest and returns the amount you lent when the loan ends.
  2. C. $800 Your target is $10,000 × 60% = $6,000 in stocks. $6,800 − $6,000 = $800 moves to bonds.
  3. C. Someone saving for retirement in 35 years The longer you have until you need the money, the more time you have to recover from drops.