Stocks, Bonds, CDs, ETFs, or Mutual Funds? 2 Easy Tables to Help you Figure Out
Handy reference table to show the differences
First, a bit of history
Financial instruments can be divided into two main types: equity-based and debt-based.
Bond: The oldest financial instrument was probably debt (bond). It was older than money and traded in the ancient city of Babylon (now Iraq) in the third millennium before Christ. The first government bond debuted in Venice around 1100.
Stock: The Dutch East India Company traded on the Amsterdam Stock Exchange in 1602 became the first publicly-listed stock. Before trading floors were created, people bought and sold stocks over their coffee, yelling across coffee shops (the first real trading floor!)
Mutual Fund: The first mutual fund, a closed-end fund, which pools the money of a number of investors to invest in stocks or bonds (or both) also originated in Amsterdam in 1774 and then migrated to Boston, U.S. in the 1890s. In 1924, the first open-end mutual fund was created in Boston where shares can be issued and redeemed continuously, as in the modern-day mutual fund.
The popularity of mutual funds grew leaps and bounds although fees remain high and the mutual funds only trade at the end of the day.
ETFs: Fast forward to the 1990s, one of the most successful financial innovations, the exchange-traded funds (ETFs), started trading in Canada. ETFs, which essentially are mutual funds that hold a basket of securities and trade like a stock, have completely revolutionized stock and bond investing due to their cheapness, convenience in trading, and diversification benefits.
Dive into the differences
Investors are generally familiar with stocks, CDs, and even bonds, and many hold mutual funds to gain market exposure while diversifying risks.
However, many find ETFs “a different ball of wax” and are unsure how ETFs differ from stocks, bonds, or mutual funds. Note that an ETF, just like a mutual fund, holds a portfolio of stocks, bonds, or both.
In the following 2 tables, I attempt to summarize and highlight their similarities and differences: (1) Stocks vs. ETFs vs. Mutual Funds (2) CDs vs. Bonds vs. Bond ETFs.
I hope you will find the reference table handy when deciding which instruments work the best for your investments.
No one financial instrument is better than the other. However, recognizing their similarities and differences can help you make the best choice to suit your particular investment style and objective.
This article is for informational purposes only. It should not be considered financial or legal advice. Not all information will be accurate. Consult a financial professional before making major financial decisions.
The original article appeared on Medium on May 6, 2022.