Stocks, Bonds and Cash: The Three Building Blocks
What stocks, bonds and cash equivalents are, how each one pays you, the risks each carries, and why most portfolios are built from some mix of the three.
Almost every investment portfolio, from a single target date fund to a spread of index funds across several accounts, is built from three basic materials: stocks, bonds and cash. They behave differently, pay you in different ways and carry different risks, which is why the SEC’s investor guidance treats them as the three main asset categories (SEC, Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing, checked November 9, 2026).
This guide explains each one in plain terms: what you own, how it can make or lose money, and what to check. It doesn’t recommend any investment or mix, and it doesn’t quote interest rates or returns, which change constantly.
Stocks: owning part of a company
A stock is a share of ownership in a company. Investor.gov notes that stocks are also called “equities,” and lists three main reasons people buy them: capital appreciation when the price rises, dividends when the company distributes some of its earnings, and the ability to vote (Investor.gov, Stocks FAQs, checked November 9, 2026).
Kinds of stock. Common stock carries voting rights and can receive dividends. Preferred stock usually has no vote but receives dividends before common stockholders and ranks ahead of them if the company is liquidated. Stocks are also grouped by company size (large-cap, mid-cap and small-cap) and by style, such as growth, value and income stocks (Investor.gov, above).
How stocks make or lose money. A stock’s value comes from what other investors will pay for it, which can rise or fall for reasons inside the company, such as a faulty product, or outside it, such as political or market events. Investor.gov describes stocks as offering “the greatest potential for growth” over the long haul, and is equally plain about the downside: “stock prices move down as well as up,” and you can lose money you invest. If a company goes bankrupt, common stockholders are last in line, behind bondholders and preferred stockholders, and may receive nothing (Investor.gov, above).
Past performance does not guarantee future results, and no official source promises any particular return from stocks over any period. How dividends are taxed is covered in dividends explained, and the tax on selling at a profit in how capital gains are taxed.
Bonds: lending money for interest
A bond is a loan. Investor.gov describes it as “a debt security, like an IOU.” The issuer, which may be a government, a municipality or a company, promises to pay interest during the life of the bond and to repay the principal (the face or par value) when it matures (Investor.gov, Bonds FAQs, checked November 9, 2026).
The three main types, as Investor.gov lists them:
- Corporate bonds, issued by companies. Investment-grade bonds have higher credit ratings; high-yield bonds have lower ratings and pay more interest in return for more credit risk.
- Municipal bonds (“munis”), issued by states, cities and other public bodies. Investor.gov notes that their interest is generally exempt from federal income tax and may be exempt from state and local tax for residents of the issuing state.
- US Treasuries, issued by the Treasury Department and backed by the full faith and credit of the US government.
Treasury securities in more detail. TreasuryDirect lists the main marketable Treasuries: bills with terms from 4 to 52 weeks; notes issued for 2, 3, 5, 7 and 10 years; bonds issued for 20 and 30 years; Treasury Inflation-Protected Securities (TIPS) for 5, 10 and 30 years, whose principal adjusts with the Consumer Price Index; and two-year floating rate notes (TreasuryDirect, About Treasury Marketable Securities, checked November 9, 2026). Notes, bonds and TIPS pay interest every six months.
How bonds make or lose money. Bonds pay interest on a schedule, and if held to maturity, the holder gets back the face value as long as the issuer pays. Investor.gov names the main risks:
- Credit risk: the issuer may fail to pay interest or principal on time.
- Interest rate risk: when rates rise, newly issued bonds pay more, so an older bond with a lower rate may have to be sold at a discount before maturity.
- Inflation risk: a fixed interest payment buys less as prices rise.
- Liquidity risk: there may not be a buyer when you want to sell.
- Call risk: the issuer may repay early, often when interest rates fall.
Bonds are often described as steadier than stocks, and Investor.gov says they “can help offset exposure to more volatile stock holdings.” FINRA adds a caution worth keeping in mind: bonds are not always lower risk than stocks (FINRA, Risk, checked November 9, 2026).
Cash and cash equivalents: money you can reach quickly
In investing, “cash” usually means more than bills in a wallet. The SEC’s guide lists cash equivalents as savings deposits, certificates of deposit, Treasury bills, money market deposit accounts and money market funds (SEC guide, above). What they share is short terms, easy access and relatively stable value.
How cash makes or loses money. Cash equivalents pay interest, or in the case of money market funds, dividends that generally reflect short-term interest rates. The SEC’s guide calls them the safest category but also the one with the lowest returns, and says “the principal concern” for cash investors is inflation risk: the risk that inflation outpaces and erodes returns over time (SEC guide, above).
Treasury bills are sold at a discount or at face value, and the interest is the difference between what you paid and the face value you receive at maturity. TreasuryDirect states that the interest is subject to federal tax but not to state or local tax (TreasuryDirect, Treasury Bills, checked November 9, 2026).
Money market funds aren’t bank accounts. A money market fund is a type of mutual fund that invests in short-term debt, cash and cash equivalents. Investor.gov explains that most aim to keep a stable $1.00 share price, but money in them “is not guaranteed by the FDIC like bank accounts are,” so it is possible to lose money. A fund that “breaks the buck” re-prices below $1.00, which Investor.gov says happens very rarely (Investor.gov, Money Market Funds, checked November 9, 2026). A money market deposit account at a bank is a different product. The FDIC lists checking, savings, money market deposit accounts and CDs at insured banks as covered, up to $250,000 per depositor, per insured bank, for each account ownership category, and lists stocks, bonds, mutual funds and Treasury bills, notes and bonds as not covered (FDIC, Understanding Deposit Insurance, checked November 9, 2026).
For money needed within a few years, MoneyMaster compares the cash options side by side in high-yield savings, CDs and Treasury bills, and its emergency fund guide covers the safety net many people build before investing at all.
The three side by side
| Stocks | Bonds | Cash equivalents | |
|---|---|---|---|
| What you own | A share of a company | A loan to an issuer | A deposit, short-term loan or fund share |
| How it pays | Price changes and any dividends | Interest, plus face value at maturity | Interest or money market fund dividends |
| Main risks (per the sources above) | Price falls; company failure | Credit, interest rate, inflation, liquidity and call risk | Inflation risk; money market funds can lose value |
| FDIC-insured? | No | No (Treasuries are backed by the US government instead) | Deposits and CDs at insured banks, up to the limits; money market funds and Treasury bills are not |
Why portfolios combine them
The SEC’s guide observes that, historically, the three categories “have not moved up and down at the same time,” so holding more than one can soften the effect of a fall in any single one (SEC guide, above). That history is a description, not a promise, and diversification and asset classes explains what combining them can and can’t do.
How much of each to hold is the asset allocation decision. Investor.gov ties it to each person’s time horizon and risk tolerance (Investor.gov, Asset Allocation and Diversification, checked November 9, 2026), and asset allocation by time horizon sets out the questions to ask.
Owning them directly or through funds
Each building block can be bought on its own: individual shares, individual bonds or Treasuries, a CD. Investor.gov notes that stock funds and bond funds are another route, and that funds pool money from many investors to hold many securities at once (Investor.gov, above). Index funds and ETFs explained covers how funds work, and opening a brokerage account covers what to check before you fund an account to hold them.
Common questions
What’s the difference between a stock and a bond? A stock is ownership in a company, and its value rises and falls with what investors will pay for it. A bond is a loan that pays interest and returns the principal at maturity, provided the issuer pays. Bondholders are paid before stockholders if a company is liquidated.
Can you lose money in bonds? Yes. An issuer can default, and a bond sold before maturity can be worth less than its face value if interest rates have risen. Inflation can also reduce what fixed payments buy.
Are money market funds the same as savings accounts? No. A money market fund is an investment fund and isn’t FDIC-insured. A savings account or money market deposit account at an insured bank is a deposit.
Is cash risk-free? Insured deposits are protected against the bank failing, up to the insurance limits, but cash still carries inflation risk. The SEC’s guide names that as the main concern for cash investors.
Are Treasury bills cash or bonds? Both descriptions are used. They are short-term Treasury securities, and the SEC’s guide includes them among cash equivalents because of their short terms.
Sources checked November 9, 2026: Investor.gov, Stocks FAQs; Investor.gov, Bonds FAQs; Investor.gov, Money Market Funds; Investor.gov, Asset Allocation and Diversification; SEC, Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing (published August 2009); TreasuryDirect, About Treasury Marketable Securities; TreasuryDirect, Treasury Bills; FDIC, Understanding Deposit Insurance; FINRA, Risk.