Unlike the volatile stock market, bonds are quite stable over long periods (most of the time). They have more predictable characteristics — owing to their fixed interest rates. This guide will make some sense of bonds for those looking to get into investing.
1. Bonds Are Expensive
Unlike stocks, bonds are traditionally much more expensive, and are given out in $1000 increments and a minimum investment of $5000. Of course, the benefit of dishing out this kind of money is that with other investors bond funds can be pooled and diversified, maximizing return while minimizing risk.
2. Have An Expert Do It For You
Since the fund is managed by investment professionals, so the theory goes, it has a better chance of achieving its goals than the sucess you might have trying to invest on your own. You have limited time and training needed to make those kinds of decisions. For that service, of course, the investor pays a fee.
3. Bonds Are Very Safe
OK, thats somewhat of a lie. Bonds arent entirely safe, but highly rated corporates (AA or above) or U.S. Treasuries are as good as it gets. Unlike the stock market, bonds are very low-risk investments. As such, they also have a very low return on your investment.
4. Buyer Beware
When choosing a representative for your bond, be sure they are reputable. Some traders charge trading fees, as much as $10 per trade, and this can add up to a huge trading fee by the end of the year. One scam some traders do is invest your money in lower amounts, in some cases charging the $10 for a trade that wouldn't make $10.01 in profit.
5. Bonds And Maturity
Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the issuer. Also bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity, a bond with no maturity.
About The Author:
Bill Dufrane
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