Stocks, Bonds, and Money Market Instruments

Stocks represent part ownership, or equity, in a company. Most investors buy stock because they expect a company to make a profit, which in turn could increase the value of its stock. However, a stock's value can change at any moment, depending on market conditions, investor perceptions and other reasons. While stocks historically have been more volatile than either bonds or money market instruments, they have also produced the highest returns over the long term. Volatility is generally measured by the annualized standard deviation of monthly total returns.

Bonds are IOUs, or debt, issued by a corporation, government or government agency in exchange for an investor’s loan. The bond issuer promises to repay the principal amount of the loan on a certain date, and to make periodic, fixed interest payments in the interim, which is why they're called “fixed income” investments. A bond’s value is determined by the interest it pays and what's happening in the economy, and it fluctuates along with interest rates. If bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing. While bonds aren't risk-free, they tend to be less volatile than stocks and can stabilize the portfolio values when the stock market struggles.

Money Market Instruments (cash equivalents) are short-term debt securities issued by governments, corporations, banks or other financial institutions. They’re typically considered cash equivalents and usually must be repaid within one year, often in 90 days or less.

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