Identification

• Stock is an equity investment. It represents a Pro-Rata share of ownership in a specific company. A bond is a debt instrument. It represents a loan to the company or organization that issued the bond. A mutual fund is a pooled investment. Mutual fund companies pool the funds of many investors to purchase the stocks or bonds of many companies to meet a specific investment objective.
  
  

Volatility

• Volatility represents the risk or probably of a change in price. Among the three types of investments--stocks, bonds and mutual funds--individual stocks offer the highest volatility, meaning their price may change dramatically, moving either up or down in value over a short period of time.
  
  Bonds tend to be more sensitive to interest rates and thus have the lowest price volatility among the three types of investments. Since mutual funds represent a diverse pool of stocks and bonds, dramatic swings in market price tend to be less than for individual stocks.
  
  

Effects

• Because individual stocks have the highest volatility, they have the highest potential for growth in market price. They also have the highest potential for loss in market price. Bonds have a definite maturity date, at which time the bond will be redeemed by the issuer for the face amount. While bonds typically provide a steady stream of income, and may increase in value due to decreases in the general market interest rates, in the long term they are not considered growth investments. Mutual funds offer investors a diversified portfolio of investments which may include stocks and bonds. Losses from one stock in the portfolio may be offset by gains in another. The total gain for the mutual fund may be less than for an individual stock, but the risk of loss is reduced as well.
  
  

Considerations

• When comparing stocks and bonds to mutual funds it is important to compare similar underlying investments. Mutual funds typically publish their investment objectives in the fund's prospectus. A mutual fund whose goal is capital preservation will not be likely to achieve significant growth, while a fund whose objective is aggressive growth may incur additional risk. Stocks and bonds do not typically come with such published objectives, although investors may glean information regarding the company's purpose from their annual report and other shareholder information.
  
  

Warning

• All investments in stocks, bonds and mutual funds involve some level of risk. Investments which offer higher returns typically also involve a higher risk. Past performance is never a guarantee of future performance. Investors may lose some or all of their investment.