What you'll learn
- Distinguish saving from investing
- Explain diversification and asset allocation
- Recognize that investments can lose money
Saving usually focuses on preserving money for near-term needs. Investing means putting money into assets with the hope of growth or income. Investing involves risk, including the possibility of losing money.
Core investing terms
- Stocks represent ownership interests in companies.
- Bonds generally represent lending money to an issuer that promises repayment under stated terms.
- Funds can hold many investments, but a narrowly focused fund may still carry concentration risk.
- Asset allocation means dividing investments among categories such as stocks, bonds, and cash.
Diversification has limits
Diversification can reduce the impact of a single investment performing poorly, but it does not guarantee gains or prevent losses in a broad market decline.
Hypothetical example
A portfolio holding only one company depends heavily on that company. A broader fund may spread exposure across many companies, sectors, or asset classes, though it still can rise or fall in value.