Investing is the process whereby capital resources (in this case money) are allocated by the investor with the expectation of earning a future positive economic return. There will be periods of time where there will be a decrease in the value of the investments. The overall investment return is based on the riskiness of the investment and time. It is important to learn about your goals, timeframe, and ability and willingness to handle risk to find the right asset allocation.
The money you invest is being used by publicly traded companies such as Google, Amazon, Walmart, and Exxon to name a few, to grow. They grow by using the invested money for research and development, expand into new markets, or deploy new products and services. The can raise money by selling equity (stock) or bonds (loans). As a common stock holder, you own a portion of that company and can participate in the gains and losses but are not personally liable for the company’s debt. You are also entitled to vote on major corporate matters, such as who sits on the board of directors and whether a proposed merger should go through.
Bonds are generally perceived as low risk because they guarantee consistent interest payments and are known as fixed income investments. With bonds, you are lending your money to a company or government. The risk is dependent on the creditworthiness of the entity issuing the bonds and its ability to pay. There are different types of bonds and stocks and details that are too expansive to cover here. To find the right investment allocation for your goals considering your time horizon and risk tolerance seek the assistance of a fiduciary investment advisor.