If buying a stock is like buying a piece of a company, buying a bond is like lending money to one. You give them cash, they pay you back later with interest. Think of it as being the bank — but for companies or the government.
Bonds = IOUs With Interest
When a company or government needs to borrow money, they can issue bonds. Here's the deal:
- You lend them money (buy the bond)
- They promise to pay you interest regularly (called the coupon)
- At the end of the term, they pay back your original amount (the face value)
Example: You buy a $1,000 bond with a 5% annual coupon and a 10-year term. Every year, you get $50 in interest. After 10 years, you get your $1,000 back. Total earned: $500 in interest.
It's predictable, it's reliable, and it's way less exciting than stocks. That's kind of the point.
Types of Bonds
- Government bonds (Treasuries): Lent to the US government. Super safe — the government has never defaulted. Lower interest rates because of the low risk.
- Corporate bonds: Lent to companies like Apple or McDonald's. Higher interest rates because there's more risk the company could fail.
- Municipal bonds: Lent to cities or states for projects like schools and roads. Often tax-free.
For teens, you probably won't buy individual bonds. Instead, you might own bond ETFs like BND (which holds thousands of bonds in one package).
Stocks vs. Bonds
| Feature | Stocks | Bonds |
|---------|--------|-------|
| You are a... | Part owner | Lender |
| Returns | Higher (but volatile) | Lower (but predictable) |
| Risk | Higher | Lower |
| Income | Dividends (maybe) | Interest (guaranteed) |
| Best for | Growth | Stability |
Unless the borrower defaults.
Most financial advisors recommend a mix of both. The classic rule: subtract your age from 100 to get your stock percentage. So at 16, you'd be 84% stocks, 16% bonds. But honestly, as a teen with decades ahead, many experts say going nearly 100% stocks is fine.
Learn more about balancing these in our building your first portfolio guide.
Why Bonds Still Matter for Teens
Even though stocks have higher long-term returns, bonds play a role:
- They cushion crashes: When stocks drop, bonds often hold steady or go up. They're your portfolio's seatbelt.
- They teach patience: Bonds show you that slow-and-steady investing works too.
- They provide income: If you need some returns without selling stocks, bond interest is there.
As you get older and closer to needing your money (college fund, car, house), you'll gradually shift more into bonds. For now, just understand what they are and how they fit into diversification.