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How to Understand Investment Basics

Confused by stocks, bonds, and mutual funds? You’re not alone. This guide breaks down the core investment types in plain language, so you can feel confident making your first investing decisions.

Person learning about stocks, bonds, and mutual funds using charts
i Did you know? Most Americans invest in mutual funds through a 401(k) or IRA—without ever picking individual stocks.
✔ Reviewed by Money Fit Team Updated July 2025
Quick Facts About Investment Basics
  • Stocks, bonds, and mutual funds are the building blocks of most portfolios.
  • Stocks mean partial ownership in a company and can rise or fall in value—higher risk, higher potential reward.
  • Bonds are loans you make to companies or governments, usually with lower risk and steady interest.
  • Mutual funds and ETFs pool your money with other investors to buy a mix of stocks and/or bonds—spreading out risk.
  • Investing regularly in a mix of these assets can help grow your money while lowering risk over time.

Understanding Investment Basics: Step-by-Step

  1. Learn What a Stock Is
    A stock represents ownership in a company. Stockholders can earn money if the company does well, but prices can rise and fall.
  2. Understand Bonds
    Bonds are like IOUs—you’re lending money to a government or business. In return, you receive regular interest payments.
  3. Get to Know Mutual Funds and ETFs
    These funds let you invest in a collection of stocks, bonds, or both, managed by professionals for broad diversification.
  4. Compare Risks and Rewards
    Stocks can offer higher returns but also more ups and downs. Bonds are steadier but usually pay less. Funds balance both.
  5. Decide How Much Risk Feels Right for You
    Younger investors often choose more stocks; those closer to retirement usually prefer more bonds and safer funds.
  6. Build a Mix (Diversify)
    Don’t put all your eggs in one basket. A blend of investments helps protect your money against losses in any one area.
  7. Review and Adjust Over Time
    As your goals or life changes, check your mix and rebalance so you stay on track for the future.

What to Expect as You Learn Investment Basics

  • It’s normal to feel overwhelmed at first: There’s a lot of jargon—focus on the big ideas and learn terms as you go.
  • Investment values will fluctuate: Stocks and funds can go up or down in the short term, but historically rise over the long term.
  • No one can predict the market: Avoid anyone who guarantees returns or “hot tips.”
  • You don’t need to pick individual stocks: Most successful investors use mutual funds or ETFs for broad exposure.
  • Help is available: Most retirement plans offer default investment options, and nonprofit counselors can explain the basics if you have questions.

Pro Tips & Common Mistakes to Avoid

  • Don’t invest in something you don’t understand: Ask questions and do your homework before putting money in.
  • Avoid chasing the hottest stock: Steady, diversified investing usually beats trying to pick winners.
  • Keep fees low: High fees eat away at returns—look for index funds or low-cost options.
  • Review your portfolio yearly: Make sure your mix of investments still fits your goals and timeline.
  • Don’t panic during downturns: Markets go up and down—selling in a panic can lock in losses.

How Piper Built Confidence by Learning the Basics

Piper, a 31-year-old graphic designer from Seattle, WA, wanted to start investing but felt intimidated by all the choices and jargon. She worried about picking the wrong thing and losing money.

Piper spent an evening reading about the basics—learning the difference between stocks, bonds, and mutual funds. She realized she didn’t need to pick individual stocks; a simple index fund offered broad diversification with low fees.

Piper opened a Roth IRA online, chose a target-date mutual fund, and set up automatic monthly contributions. She checks her account once a quarter and adds more as her budget allows.

The result? Piper feels less anxious, more in control, and confident that she’s building a strong financial future—without needing to be an expert.

Frequently Asked Questions

What’s the difference between a stock and a bond?
A stock is ownership in a company—you share in its success (or losses). A bond is a loan to a company or government, and you earn interest over time.
What is a mutual fund?
A mutual fund pools money from many investors to buy a mix of stocks, bonds, or both—making it easier to diversify even with small amounts.
Are mutual funds and ETFs the same?
They’re similar—both hold a basket of investments. ETFs trade like stocks during the day, while mutual funds are priced once daily.
Do I need a lot of money to start investing?
No. Many brokerages let you start with as little as $10 or $20, and most mutual funds and ETFs are accessible to small investors.
How do I know which investments are right for me?
Think about your goals and how comfortable you are with risk. A mix of stocks and bonds (often through a mutual fund or ETF) works for many beginners.
Can I lose money with stocks or funds?
Yes. All investing has risks, but long-term, diversified investing helps reduce the chance of big losses.

Questions About Managing Your Debt?

We’re not investment advisors, but our nonprofit counselors can help you build a solid foundation by tackling debt and answering your questions about saving and financial wellness. If you want to explore your options, be sure to reach out.

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About the Author

Rick Munster is a personal finance expert and author with over 23 years of experience in the credit counseling industry. He currently serves on the board of directors for the Financial Counseling Association of America and has published more than 250 articles on personal finance. Over the course of his long-standing career at Money Fit, a nonprofit credit counseling organization, Rick’s insights have been featured by several news outlets on topics such as credit counseling, debt management, and financial education.

Read Rick’s full profile

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NOTE: This sheet is to inform new or returning clients about our services, records, fees, and limitations that may affect you as a consumer of our services. This form also discloses how we might release your information to other agencies and/or regulators. If you do not understand a statement, please ask a Debt Reduction Services (DRS) counselor for assistance.

Debt Reduction Services, Inc. (DRS) has put into place policies and procedures to protect the security and confidentiality of your nonpublic personal information. This notice explains our online information practices and how we use and maintain your information to conduct our financial education and credit counseling sessions and to fulfill information and question requests. This privacy policy complies with federal laws and regulations.

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Disclosure to Client for HUD Housing Counseling Services

Debt Reduction Services, Inc. and its financial education arm, Money Fit by DRS, offer the following housing counseling and educational services related to housing, personal finance, and bankruptcy certificates to consumers:
  • Housing Education Courses: DRS offers many online self-guided education programs classified as Financial, Budgeting, and Credit Workshops (FBC), Fair Housing Pre-Purchase Education Workshops (FHW), Homelessness Prevention Workshops (HMW), Non-Delinquency Post Purchase Workshops (NDW), Predatory Lending Education Workshops (PLW), Pre-purchase Homebuyer Education Workshops (PPW), and Rental Housing Workshops (RHW). These courses help participants increase their knowledge of and skills in personal finance, including home affordability, budgeting, and understanding the use of credit, as well as predatory lending, loan scams, and other fraud prevention topics, fair housing, rental topics, pre-purchase homebuyer education, non-delinquency post-purchase topics including home maintenance and/or financial management for homeowners, homeless prevention workshop, and other workshops not listed above relating to personal finance and housing. Course details are found below under “Housing Workshops.”
  • Home Equity Conversation Mortgage (HECM) Counseling (RMC): Via telephone and virtual platforms, we offer the required HECM counseling nationwide in addition to in-person counseling in Boise, Idaho. We also offer in-home counseling options in thirty counties across southern Idaho for an additional fee to cover our travel and additional staff time costs.
  • Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase) (FBC): Clients receive counseling and materials on the proper maintenance of their home and mortgage refinancing. Clients can find help and resources by phone, in our Boise office, or virtually on all topics related to stabilizing their long-term homeownership.
  • Services for Homeless Counseling (HMC): Clients receive phone, virtual, or in-person (Boise) counseling to evaluate their current housing needs, identify barriers to and goals for housing stability, establish a path to self-sufficiency, and connect with emergency shelters, income-appropriate housing, and/or other community resources (e.g. mental healthcare, job training, transportation, etc.).
  • Pre-Purchase Counseling (PPC): Clients receive counseling through the entire homebuying process. Assistance may involve creating a sustainable household budget, understanding mortgage options, building their credit rating, and putting together a realistic action plan to set and achieve homeownership goals.  Additionally, clients will receive materials and resources about home inspections and other homeownership topics relevant to successfully maintaining a home.
  • Rental Housing Counseling (RHC): Via phone, in-person appointments (Boise, ID), or virtual platforms, clients receive housing counseling relevant to renting, including rent subsidies from HUD or other government and assistance programs. Topics can also address issues and concerns having to do with fair housing, landlord and tenant laws, lease terms, rent delinquency, household budgeting, and finding alternate housing.
DRS also offers the following services:
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  • The Budget Briefing and Debtor Education Certificates that are required during the Bankruptcy filing process;
  • A Student Loan Repayment Plan Counseling and application service.

Relationships with Industry Partners

Through such services, DRS has established financial relationships with hundreds of banks, credit unions, and creditors such as American Express, Bank of America, Barclays, Capital One, Chase, Citibank, Credit One, Discover, Synchrony, US Bank, USAA, Wells Fargo, and others.

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The client is not obligated to receive, purchase or utilize any other services offered by DRS or its exclusive partners to receive financial education or housing counseling services. Alternatives: As a condition of our counseling services, in alignment with meeting our client services goals, and in compliance with HUD’s Housing Counseling Program requirements, we may provide information on alternative services, programs, and products available to you, if applicable and known by our staff. Alternative DMP services include negotiating better repayment terms directly with your individual creditors, paying your debts as agreed, or, in extreme cases, filing for personal bankruptcy. Alternative credit and education services can be found through MyMoney.gov or the Jump$tart Clearinghouse of online financial education resources. Housing counseling alternatives can be found through HUD at www.hud.gov/findacounselor.
Finally, you understand that you may revoke consent to these disclosures by notifying DRS in writing.
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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

Rental, Fair Housing, Predatory Lending / HOEPA, Post-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. credit, budgeting, homeless prevention, debt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).

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Housing Counseling and Education Fee Schedule  

Online EDUCATION Program Fees* 

eHome Homebuyer Education Course: $99 per household** 

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours) 

Online Workshops: $49 per participant 

  • Rental, Fair Housing, Predatory Lending Post-Purchase, HECM Family Member  
  • Approximately 1 hour each 

Other Self-Guided Financial Literacy Webinars: $0 

  • Credit, budgeting, homelessness prevention, debt prevention 
  • Approximately 30-60 minutes each 

One-on-one COUNSELING Fees* 

Pre-purchase Home Buying, Renter Issues, Homelessness, and Fair Housing: $0  

Post-purchase Ownership and Maintenance, HOEPA or Financial Management $75/hr  

Reverse Mortgage/HECM Counseling with Required Certificate $200 per household†  

Credit Report Fee Paid Directly by Client 

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable 

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page 

**Household is an individual or a couple  
†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there)