A Random Walk Down Wall Street

Common stock represents partial ownership of a company, and it is a tradeable security. Generally, stocks are issues in an IPO, or initial public offering, at which time investors buy stock, giving the company money as an investment and receiving partial ownership in return. After the IPO, stocks are traded on the stock market, where their value varies with the actual or perceived performance of the company. In Random Walk, stocks are the more common security that Malkiel discusses, and he notes that stock should form the basis of younger investors’ portfolios. They generally have a greater risk and reward than bonds.

Bonds, like stocks, are tradeable securities, but they are more like a form of debt than ownership. Rather than owning a portion of the government or company that issued the stock, bonds represent a kind of loan, in which the investor is loaning the company or government a fixed sum in exchange for that sum and interest later. Bonds are considerably less risky than stocks, though Malkiel notes that changes in interest rates and inflation may damage the overall realized return of the bond for the investor. Malkiel suggests investing more heavily in bonds as investors age, as they are easier to predict and rely on over time.