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Stocks are ... well, shares of a company.

Bonds are debt. By buying a bond, you are loaning the company a certain amount of money (however many bonds you buy). In return, the company is promising to pay back the principal at a certain interest rate at a given time. It's a mini loan, I guess you could call it.

There are also many, many different types of other debt, known as "notes." Senior, subordinated, secured, unsecured - those determine your place in the creditors' line if a company goes bust. Convertible notes give a company the right to call the debt and exchange it for common stock (swapping the debt - a liability - to boost equity, in accounting terms).

Mutual funds are exactly what the name suggests: You buy into a cooperative fund and some schmuck decides how to invest that money for you. It's considered a good way to invest since the risk is spread across a wide variety of stocks and bonds, but you have to be careful about how fund managers allocate the money.

I would explain that whole mutual fund scandal from two years ago, but, not now. Maybe a little later.