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While it's possible to buy individual stocks and bonds, it's usually not a good idea, especially for those just starting out and wanting some diversification on a limited budget. For simplicity's sake, I'm going to tell you to stay away from all types of investments except mutual funds (as you learn more, feel free to disregard that advice, but far too many people start with poor investment choices). That means you'll never fall prey to the traps of high-pressure (and commission!) insurance salesmen, etc. Just say "no thank you" to any variable universal life insurance policy, and every variable annuity you're ever offered, and you'll be better off for it. Their fees are too high, their operating policies too confusing, and the returns are no better (and frequently much worse) than what you can get by investing directly with mutual funds.
Mutual funds, unlike those other investments, are simple to understand. A bunch of investors (like you) pool their money together, and hire someone to invest it for them. This fund manager selects stocks or other investments for the mutual fund, which is mutually owned by all of the investors. So even one mutual fund share gets you the diversification of all of the stocks (and/or bonds) that the fund owns. When the value of the fund's holdings go up, the value of each mutual fund share (called its Net Asset Value, or NAV) increases proportionally. Mutual funds can invest in just about anything, and you need to read the fund's prospectus (owner's manual) before giving anyone your hard-earned cash. The prospectus will let you know what the funds investment strategy is: if bonds, will it invest in short-term or long term issues? Treasuries or corporate bonds? If stocks, does it track a particular broad market index or does it specialize somehow? Look for terms like large cap, small cap, growth, value, index, domestic, international, etc. Don't be too enamored by the returns they're reporting for how they've done in the past. The future is not the past, so focus instead on the two things that matter more: investment style, and fees. Don't ignore the fees, as they are a major drag on your investment returns. While the average mutual fund has a total management fee of over 1%, you don't want an average fund. Try to stick with funds that charge less than half that (0.50% or less). Index funds are a great choice. These are mutual funds that are run by a computer, set on "auto-pilot" to track a market index by investing in the securities that make up the index (which can be stocks or bonds). You've probably heard of the "Dow Jones" (a 30-stock index) or the "S&P 500" (500 of the biggest stocks in the U.S.). These are indexes. One great one for new investors (and everyone else, really) would be the "Wilshire 5000", which basically contains all of the stocks (now well over 5000) of the United States stock market, including both large and small companies, growth and value stocks. It doesn't get much more diversified than that. What investing in an index fund will get you is the average return of the stocks that make up the index. While an "average" return may not sound too good right now, you should know that over 70% of mutual fund managers fail to do better than the market index every year, and which managers happen to beat the market in any particular year seems to have more to do with coin-flipping than stock-picking ability. So index funds are actually a really good way to go. Once again, I have to put in a plug for Vanguard. They have the lowest fees overall of any mutual fund company out there, and their specialty is index funds (they started the very first one). They have a really nice "total stock market index fund" that would make a great first fund for anyone starting to invest for retirement.
There are also balanced funds, which invest in some kind of mix of the different asset classes (like 40% bonds, 60% stocks, etc). They're intended to simplify investing, since you now have two asset classes in one fund, rather than needing two funds to get the same diversification. They're only appropriate, however, if your ideal asset allocation matches that of the fund (more on asset allocation later).
One special type of balanced fund worth considering is a "target retirement fund". We'll talk more about these later when we discuss asset allocation, but basically you pick the fund that best matches the year you want to retire, and the fund starts out investing relatively aggressively, and then gets progressively conservative (less volatile) as your retirement date approaches. In other words, it makes all the allocation decisions for you. With this type of fund, you could literally just invest in one fund throughout your whole life, having some proportion of your paycheck automatically deposited each month throughout your career, and never have another investment decision to make until you retire. They're great. However, I happen to like having full control over my asset allocation, and use several different funds to get a mix tailored to my own desires. Then again, I love this stuff, and have put in the time to (hopefully!) know what I'm doing. If you don't want to think about your investments regularly (asset allocation, annual rebalancing, etc), a target retirement fund is a no-brainer.