Ask the Fool

Fixed Income vs. Equity

Q: What’s the difference between “fixed income” and “equity income” funds? — O.M., Binghamton, New York

A: They’re both mutual funds — or similarly structured exchange-traded funds (ETFs) — that aim to deliver income to shareholders. A “fixed income” fund is typically invested in securities that pay out interest income on a reliable schedule — such as government or corporate bonds, certificates of deposit (CDs), and money market funds. The term “fixed income” is often used as a proxy for “bonds.” The term “equity” refers to stocks, so an “equity income” fund is one that aims to generate income from the dividends of stocks in which it’s invested.

Bonds have a reputation as safer than stocks, and they can be less volatile, but they vary widely in their riskiness. U.S. Treasury bonds, backed by the federal government, are quite safe, while corporate bonds carry more risk (and thus higher interest rates). Junk bonds sport the highest interest rates — because they’re issued by risky companies. Over long periods, the stock market has usually outperformed bonds, so you may want to focus most or all of your long-term investment dollars on stocks.

Q: What does “OTC” refer to? — E.L., Forest Hills, Michigan

A: It’s an acronym for “over the counter,” and you’ll see it next to thousands of securities that don’t trade on a major exchange such as the New York Stock Exchange or Nasdaq. OTC stocks tend to be those of small companies that don’t meet listing requirements for an exchange, though some major international stocks can also be found in the OTC market. Over-the-counter stocks are traded via broker-dealer networks, by computer or by phone. Learn more at Fool.com/investing/stock-market/exchange/otc-markets.