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finance a la shmoop. what's the difference between stocks and

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bonds? welcome to our little town. the last stop on our tour ends here at the

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town square with an excellent display of stock. and then over here we have the [man in stocks]

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bond .hey wrong tour! hi me again mister shmoop

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you may remember me from such shmoop classics at the st. Valentine's Day

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Massacre college 101 and the ever popular ode to a freakin comma. but today

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I'm here to talk to you about the difference between a stock and a bond.

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financial kind. yep long way to get here but the difference is really simple

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stocks are about ownership when you own some shares of stock you own a piece of

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something .when you own a bond you are essentially just the renting money to

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someone .that's it .stocks and bonds get mentioned together all the time because

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they're both investment vehicles .that is places to put your money. but as far as

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what backed them up well they're really different animals. so let's dig in a bit

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on stocks. meet whatever dot-com. it has 10 million shares outstanding. outstanding

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not meaning that it's a strictly good company. it's just a term that refers to [kids smile on the couch]

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the total number of shares of ownership of the company or said another way it

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means that the Pie of whatever com is cited in to 10 million slices and each

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slice is called yes shockingly a share. whatever.com trades publicly for 10

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bucks share giving it evaluation of a hundred million dollars. that is

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investors who are paying $10 a share for whatever com are valuing the company at

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a hundred million dollars. that's 10 million shares times $10 to get you

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there. yeah ten million slices of pie. big pie. okay so you decide to put all of

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uncle Larry's inheritance money into whatever com at ten bucks a share.

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that's a hundred grand. there we go. you are now the proud owner of 0.1% or [woman smiles holding money]

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ten thousand shares of whatever dot-com congratulations.

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maybe .well things with whatever dot-com go along just fine in one day you are

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sweating on the Stairmaster and the ticker what scrolls buy on CNBC showing

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up five hundred percent. the headline makes you giddy. woo of the whoo

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you just turned your 100 from uncle Larry into 500 grand .why ?well

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because Apple has just announced that it will pay 50 bucks a share on 10 million

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shares that valued whatever dot-com it's 500 million dollars to buy the company.

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yeah so whatever icon becomes now part of Apple. so you celebrate. but things

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could have done different .condolences there .yeah stocks can go that way. [woman drives red sports car]

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so he just turned uncle Larry's life savings that he gave to you and that you

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invested in this risky new company into nothing. yeah nice job they're. a big fat

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hundred grand smoking hole in your bank account .so yeah stocks carry a lot of

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risk it can be good but oh it can be bad. check out this chart for the S&P 500 for

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the last hundred or so years. well the S&P 500 is just an index or the

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500 largest companies in the world generally speaking. but with a high

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Western lean. on the selection of the company there goes Westerners who built

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the index. well it's the most common representatives of performance when

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investors ask so how's the market doing? anyway back to the chart. well you

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can see from the early 1950s until the mid 1960s or so not much went on and

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just kind of flat they're paying dividends then we had 70s and basically [stock market chart shown]

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the market was flat for a decade but dividends went up and up and up. it's the

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company still we're making a lot of cash profit.. and Reagan came into office in

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the early 80s now 1980 there said give us our Iran hostages back and all that

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and then the market took off and it went nuts. there's a little bit of correction

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there nineteen eighty eight nine there is sell them and then blam the greatest

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bull market in history all the way up until 2000. when things burst and yeah

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it's been quite a ride. so you can see up down up down

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but generally from 1950 to 2017 change up and up is really nicely up. that's

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what we do here. alright but the main takeaway is that over time stocks went

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up on average from here to here about eight or nine maybe ten percent a year.

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so what does that tell you about stocks? well that risk is less generally [stock market chart shown]

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speaking if you're able to hold stocks for a long time. that is over time the

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markets in the capitalist system basically bail you out of problems if

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you can hold the stocks long enough .so if you're 20 think lots of stocks. it's

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you know you won't need the money for decades if you're a newly retiring 75

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year old not so much. you just can't afford to live through a bad bear market.

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so instead maybe you do halfsies with stocks and bonds or you go all-in just

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on bonds. and live on a budge.t all right so what is a bond well take your

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friendly cable and internet provider Comcast. they borrow money all the time

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from the public so they can buy smaller cable companies and TV companies and

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content companies or pay for programming you know or buy gum.

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well the lion's share of Comcast bond offerings have paid about 5% a year

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which isn't much but on the upside none have ever not paid their interest. in

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fact waste fewer than 1% of bonds in the u.s. don't fully pay up.

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meaning that in general for decently rated bonds that is bonds which are

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rated by experts as being safe bets to fully pay off both principal and [bonds examined by experts]

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interest almost never default. as Shakespeare said default is not in Our

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Stars but in ourselves. and it's close enough. well but think about the

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difference on an investment which compounds ie grows exponentially each

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year at a rate of 5% for 20 years versus an investment that compound at 9% over

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20 years. the difference is about 4% a year doesn't sound like much maybe, but

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over time that's a really big difference. let's pull out of our handbag our handy

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dandy rule of 72. which is a simple back-of-the-envelope calculation tool

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that helps you figure out how many years it takes an investment to double .if an

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investment grows at 10% a year it doubles in 7.2 years which means we lose

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a full doubling in value of our investment here using the 5% bond. in 72

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divided by 4 there we go for 18 years .so said a different way after 18 years have

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just investing in bonds for suggest investing in stocks we end up with half

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as much money if history repeats itself and it doesn't always. but it's something

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think about. anyway that notion feels like a lot to pay for

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the greater safety or certainty of a bond. all right so now you know your

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stocks from your bonds and it'll come in handy if you're ever robbed by one of

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them at gunpoint and have to you know pick them out of a lineup. [lineup shown]

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