In recent weeks it’s been hard to avoid being inundated by information about the economy and stock market. If you have found yourself in the middle of a conversation and feeling totally out of the loop about stocks, bonds and mutual funds, we are here to simplify the world of investing using an analogy most of us can understand — our wardrobes!

Let’s begin with the basics — if we compare investments to clothing, bonds would be the fundamental (though kind of boring) necessity that you build your wardrobe on.  For example, a plain white button-down or a pair of straight-leg jeans.

Bonds are issued by companies and municipal, provincial and federal governments.  In exchange for you lending them money, they issue a bond that promises to pay you back your money in the future plus interest. Bonds are much less risky than stocks.

Stocks, on the other hand, would be the more trendy add-ons that may seem a bit more risqué — but also have a lot to offer and are somewhat sexy. 

When you buy a stock, you buy a part of a business. As the value of the business or company fluctuates, the value of the owners “share” also increases or decreases.

Of course, some companies are riskier than others. If you choose to invest your money in a blue chip company (a company that is well established and well respected) as opposed to a newly public company —although you are likely to make less money, these companies tend to be less risky.  

Last, we have mutual funds. Mutual funds represent what your closet should look like: A balance of basics that you can count on, mixed with other pieces you’re betting will enhance the overall worth of your wardrobe (although there is a risk that they may not).

So, if one piece drops out of a fashion, or decreases in value, you still have many others to offset the loss.

Mutual funds offer you an opportunity to contribute money into a pool with other investors to purchase large amounts of stocks, bonds or both. You invest in a fund, run by a professional, who buys shares or stock or bonds. 

Mutual funds offer some unique advantages. As mentioned, these funds are comprised of both stocks and bonds, so through diversifying your investment, you lower your risk. 

Also, as a general rule, you are able to sell shares quickly if you are in need of some cash. Lastly, there is a professional overseeing your investments. 

For more information on investing, check out our new book Smart Cookies Guide to Making More Dough, on sale in book stores this month, and visit smartcookies.com for more on living your richest life.

If you have questions or comments for the Smart Cookies, please feel free to write to us at smartcookies@metronews.ca.  

– Tune in Wednesday night at 9 p.m. EST/PST on the W Network and be sure to visit www.smartcookies.com for more tips.