Ok so you've determined your risk tolerance and asset allocation, so what do you fill it up with? Stocks? Bonds? Mutual Funds? Options? ETF's? Alternative investments? There are way too many things out there to invest in! So lets keep it basic. Most people will look at the following:
Yes, yes I know...a bond fund is a type of mutual fund. Let's make the distinction in here so I can just refer to it as something different. Usually with mutual funds there are bond funds, equity funds and funds made up of both. Lets go over stock basics.
A stock is a share of ownership in the company. For instance, say you own a share of Apple. You are considered a shareholder and therefore have ownership in Apple. Yes, now Steve Jobs and the company need to listen to you! Ok, so maybe not that far yet until you have a ALOT of Apple stock.
Now that we've gone over what a stock is, lets define a mutual fund. A mutual fund is a basket of stocks.
An ETF (exchange traded fund) is also a basket of stocks, but it isn't actively managed...usually tracking an index. For example DVY is an ETF that tracks the Dow Jones.
A bond fund is a fund made up of bonds ( a basket of bonds.) A bond (not to be confused with a bond fund) is debt (almost like an IOU) that is issued by corporations and governments. The entity issuing the bond will usually provide interest semi annually to the bondholder (whoever lent them the money) and at the end of a specified term the entire amount borrowed will also be returned.
Now that you've got an idea of what is what, how do you decide what stocks or mutual funds to put in there? Before we decide on that we should look at how we want this money managed - Actively or passively? We'll get into that next time.