Guide · 6 min read
Four words that get thrown around as if everyone knows what they mean. They're simpler than they sound. Here's each one in plain English, what it does for your money, and which ones most people should actually own.
A stock is a small piece of a company. Buy a share of Apple and you legally own a tiny sliver of Apple. You make money two ways: the share price goes up (you sell for more than you paid), or the company hands out some of its profits to shareholders, called a dividend.
Owning individual shares means betting on individual companies. Some do brilliantly. Some go to zero. Picking winners reliably is very hard, and most professional fund managers fail to do it. Which is why most sensible long-term investors don't buy individual shares — they buy hundreds at once through a fund (see below).
A bond is a loan. Instead of borrowing from a bank, a company or government borrows from you. In return they promise to pay you a fixed rate of interest each year and to repay the loan on an agreed date.
UK government bonds are called gilts. They're about as safe as it gets — short of the UK government going bust, you get your money back. Company bonds (corporate bonds) pay a bit more interest because the company is more likely to miss a payment than the government is.
Bonds are quieter than shares. They go up and down less, and earn less over time. They're the seatbelt in a portfolio, not the engine.
ETF stands for Exchange-Traded Fund. It's a basket of investments — often hundreds or thousands of shares or bonds — that you can buy in one go, like a single share, through any normal investment account.
The most common ETFs are index trackers. They don't try to be clever. They just hold every company in a market and follow it up or down. A global tracker like an MSCI World ETF gives you a slice of around 1,500 of the biggest companies on the planet for a fee of roughly 0.1–0.2% a year.
Also a basket of investments. The difference is plumbing: a mutual fund is priced and traded once a day directly with the provider, rather than throughout the day on a stock exchange.
In the UK these are usually called OEICs or unit trusts. The modern low-cost index funds you'll see — Vanguard LifeStrategy, Fidelity Index World, HSBC FTSE All-World Index — are all funds in this sense. They do the same job as an equivalent ETF and most people will never notice the difference.
An active fund pays a manager to try to beat the market by picking winners. Fees are typically 0.5–1%+ per year. A passive (index) fund just owns the whole market. Fees are typically 0.05–0.25%.
Decades of evidence show that the vast majority of active funds underperform a simple index tracker once fees are deducted. A 1% fee difference compounded over 30 years can cost you a quarter of your final pot. For almost everyone, low-cost index funds win.
The headline
Boring, on purpose:
— One global equity index fund (a slice of thousands of companies around the world). This is the growth engine.
— Optionally, a bond fund, sized to how much volatility you can actually stomach. A 30-year-old with a steady job needs almost none. A 60-year-old approaching retirement needs more.
That's it. No stock tips, no crypto, no leveraged anything. You add money every month, leave it alone, and let compounding do the work.
Three things actually matter when investing: do a little research, be consistent, and start early. Being a stock-picking genius isn't on the list — and decades of evidence say the people who try usually finish behind a boring global tracker.
A stock (or share) is a small piece of a company. If you own one share of a company that has issued one million shares, you own one-millionth of it. You make money if the share price rises, or if the company pays out a slice of its profits as a dividend.
A bond is a loan you make to a company or a government. They promise to pay you a fixed amount of interest every year and give your money back on a set date. Bonds are generally less risky than shares, and pay less in return.
An ETF (Exchange-Traded Fund) is a basket of investments — often hundreds or thousands of shares or bonds — that you buy in one trade, like a single share. Most are 'index trackers' that quietly follow the whole market and charge very low fees.
A mutual fund is also a basket of investments, but it's bought and sold once a day directly from the fund manager rather than traded on an exchange. In the UK these are usually called OEICs or unit trusts. Modern low-cost index funds (Vanguard, Fidelity, HSBC, iShares) work in much the same way as an ETF.
Mostly how you buy them. ETFs trade on the stock market all day; mutual funds settle once a day. For long-term investors paying in monthly, both work fine. ETFs often have slightly lower fees and are more tax-efficient inside a General Investment Account; mutual funds can be easier for automatic monthly contributions.
An index fund is a fund that simply tries to copy the performance of a market — for example, every company in the FTSE 100, or every large company in the world. Because no one is being paid to pick stocks, fees are very low, and they reliably beat most actively managed funds over the long term.
General information, not financial advice. Investments can fall as well as rise.