How do I learn stocks and bonds?

I wanted to know the same thing, and I spent 4 years getting a bachelor's degree in finance to try to find the answer. Please allow me to save you a lot of time by giving you the reader's digest version (this is actually kind of long, just skip to #4 if you don't want to read a bunch of my rambling):

1. Stocks are an ownership claim on a company. Let's say me and 99 other people get together and start up a business. We all kick in 10 bucks (collectively we raise $1000.) We make 100 shares of stock, and give one to each person who kicked in money to prove that they're owners and are entitled to 1% of the earnings of the company. We then pick the smartest person among us to run the company, and we pay him 10 bucks per day to do it. He's the CEO. All of the rest of us shareholders just trust his judgement and take our share of the earnings. If I want to sell my share of stock, I can sell it to anybody who wants to buy it. I don't have to sell it for $10; I can sell it for whatever I can get for it.

2. Bonds are IOUs. Let's say my company from the previous example needs to borrow $100 to buy something. Rather than go to a bank, they go Bob, who thinks that the company will make lots of money in the future. Since he feels good about the company, he's willing to lend them the money instead. This is good for the company and Bob, because banks generally charge higher interest than Bob would, and they also pay less on deposits than the company would pay Bob (that's how banks make money.) The company gets $100, and in return they give Bob a piece of paper that says that he's entitled to $110 at the end of the year. If Bob wants, he can sell that piece of paper to someone else. Whoever has the paper gets the $110 bucks at the end of the year.

3. The Dow Jones Industrial Average and the NASDAQ are indexes. They follow the earnings on certain companies and report a score based upon how well the companies in the index did. If the score goes up, the companies in the index did well. If the score goes down, the companies in the index did poorly. The Dow and NASDAQ are very over-rated; you should be concerned with the S&P 500, which tracks 500 large American companies.

4. **THE MOST IMPORTANT POINT** : There is no reliable way to pick which stocks will do well and which stocks will do poorly. Current stock prices already reflect all publicly available information about the stock. There's no way you can go on Yahoo Finance and find stocks that are underpriced or overpriced. The only thing that affects stock prices is unexpected information, and unexpected information is random. That's why it's unexpected!

People will argue this point with you until they're blue in the face. People like to think that they're super smart and they can pick stocks better than everybody else. People will brag about their success stories, and tell you that they bought this or that stock and it did really good after they bought it, and they knew it would go up because of this or that reason. The thing is that this same person probably won't tell you about all the times that they got burned, or if the rest of the stock market happened to do well the same day, or whatever.

JUST DIVERSIFY AS MUCH AS YOU CAN. Buy a ton of mutual funds that cover a wide range of domestic stocks, international stocks, and bonds. You're probably a young guy/gal. If you invest $5000 per year every year starting when you're 20, and earn a 12% return on average per year (which is reasonable for a diverse portfolio over the long term), you'll have about $2.5 million by the time you're 65.