The stock market can seem intimidating to many, but at its core, it’s a powerful tool that may help you build wealth over time.

For beginners, understanding your potential investment avenues is the first and most crucial step—here’s a breakdown of some of the basic options.

Stocks

When you buy a stock, you purchase a small slice of ownership in a company, which is termed a share or equity. As a shareholder, you may benefit in two main ways:

• Capital gains: If the company performs well and its value rises, the price of your stock will also increase. You can then sell your shares for more than you paid for them, meaning you earn a profit.
• Dividends: Some companies distribute a percentage of their revenue to shareholders in the form of dividends, or periodic cash payments. These can provide you with a steady stream of passive income.

There are several different types of stocks available. Blue-chip stocks, for instance, are shares in larger, more established, and more financially stable companies like Apple and IBM; these are often considered less risky and more reliable. On the other hand, growth stocks are those invested in companies that are expected to grow quickly, offering higher potential returns but also higher volatility. Other options include value stocks, income stocks, and defensive stocks.

Bonds

While stocks represent ownership, bonds are essentially loans you give a company or even the US government, which will use your funds to fuel certain projects or growth opportunities. When you buy a bond, the issuer promises to pay back the principal, or your original investment amount, by a specific date and will also make regular interest payments to you.

Bonds are generally considered less risky than stocks because you are virtually guaranteed your money back unless the issuer defaults on repayment. They provide a predictable income stream and can help stabilize a portfolio that includes more tenuous investments.

Mutual funds

Imagine a single investment that holds shares from many different companies—that’s the essence of a mutual fund. It involves pooling money from several investors, which is then used to buy a diverse portfolio of stocks, bonds, and/or other types of securities. Buying into a mutual fund means owning a piece of this shared portfolio.

Entering into such an arrangement can yield numerous advantages. For one, its diversification enables you to spread your risk across an array of investments so that if one company performs poorly, it has a smaller impact. Plus, mutual funds are supervised and handled by professional portfolio managers. These individuals make buying and selling decisions on behalf of their investors, allowing you to potentially profit off their investing expertise.

ETFs

An exchange-traded fund (ETF) is similar to a mutual fund in that it holds multiple securities. However, a key difference is how they are traded. Unlike mutual funds, which can only be purchased once they are priced at the end of the day after the stock market closes, ETFs are bought and sold on a stock exchange throughout the day like individual stocks, lending you more flexibility.

These investments are often recommended for beginners because they provide diversification and greater transparency (holdings are disclosed daily rather than monthly or quarterly, as with mutual funds). You can find ETFs that focus on specific sectors, industries, or the entire market. Overall, they are a convenient and simplified way to buy numerous stocks.

Index funds

A specific type of mutual fund or ETF, an index fund is designed to mirror the performance of a specific market index, a group of similar investments used to measure a market segment. Instead of a manager picking individual stocks, the fund simply buys stocks from all companies within the index it tracks. For instance, an S&P 500 index fund gives you a piece of the five hundred largest publicly traded businesses in America, offering you the relative stability of a diverse portfolio.

Index funds come with low transaction costs, are simple to report for tax purposes, and do not require the use of an investment manager. However, some do demand a hefty investment minimum that could price out some individuals.

Getting started

Before you fuel your funds toward a specific venture, it’s essential that you come to understand your own financial goals, your risk tolerance, and the amount of money you want to invest. For best results, work with a financial advisor, who can help you build a reliable plan and well-diversified portfolio that may potentially boost your financial future in the long run.