7. Stocks and Bonds. When a company needs to raise money, it has the option to issue stocks or bonds to the general public. In turn, you have the option to give them money by purchasing its stock or bonds. By buying stocks, you are essentially buying a very small piece of the company. If the company does well, your stock will go up in value. If the company does poorly, your stock will go down in value. If you buy bonds, it means you are loaning the company your money in return for an interest (income) payment and the eventual return of the amount you loaned. Stocks and bonds do not guarantee repayment.
8. Diversification. In a nutshell, this is a fancy way of saying, “Don’t put all your financial eggs in one basket.” Every investment has a different level of risk associated with it. When you make an investment, you want to spread your risk over different companies, industries and even countries. This is very difficult to do if you’re young and don’t have a lot of money to invest. This is why ETFs (and/or Mutual Funds) are a great diversification tool.
9. ETFs. Exchange Traded Funds are the newer, cooler Mutual Funds. An ETF is a way to invest in the markets without having to go all in on a single stock, which can be a risky move. Instead, ETFs contain a preselected collection of stocks and bonds, so that if a single stock or bond is performing badly, there's a chance another one in the batch will even it out and help minimize loss. ETFs are also usually cheaper than Mutual Funds and they are considered “more liquid” because you can buy and sell them throughout the trading day, whereas Mutual Funds can only be bought/sold once a day, at the end of the trading day.
10. Mutual Funds. The older version of ETFs, Mutual Funds were created to allow investors to get access to a bunch of stocks with a single trade. Most Mutual Funds are actively managed, whereas ETFs are passively managed. Active management means that a team of professionals are in charge of deciding which stocks the mutual funds should contain and in what mix. Passive management does not involve a team of professionals. Instead the fund is linked to an index, like the S&P 500—a list of the 500 largest publicly traded companies like Facebook or Johnson & Johnson, all weighted by market capitalization—and contains those exact 500 stocks.