Investing in the stock market is the way to go if you want to have the potential to make big returns on your money, but for some, this comes with a great deal of risk. That’s why some people choose to invest in bonds instead. While investments in the stock market are risky, those in bonds are generally safer. The key difference between the two is simple: bonds are IOUs.
Bonds are a type of financial instrument used by governments and corporations to raise money. Although these bonds work a lot like loan agreements, they’re not the same thing. A bond is an IOU – an indication that whoever the borrower is, they owe the bondholder money. The bondholder receives interest payments until the bond’s expiration date when the face value is paid back – that’s the principal. So, if you invest in a company’s bonds, you’re lending them money, for which they will pay you in interest over the years.
How to Buy Bonds
“Investing in bonds” sounds pretty scary, but it doesn’t have to be. Bonds, in their simplest form, are a loan to a company or government. You loan them money, and in return, they pay you regular interest payments. But what if they can’t pay you back? Well, that’s where it gets a little tricky. When you buy bonds, you’re essentially taking a risk that the company or government will either pay you back as promised or go bankrupt. If they go bankrupt, you may lose the money you invested, but you’ll still get paid the interest you’re due.
Buying bonds is one of the most important ways to save for the future, and the best way to get started is to open a brokerage account. Most brokerages (like Fidelity and Charles Schwab) offer accounts that allow you to buy and sell bonds as well as stocks, so you don’t need to open a separate account with a broker that specializes in bonds.
Once you’ve opened your account, you’ll choose bond funds from the list of available investments. There are several types of bonds, including corporate bonds and government bonds. Corporate bonds are an attractive option because they offer higher interest rates and more flexible terms than Treasuries, but they come with more risk. Government bonds are safer but usually offer lower interest rates.
Where Can You Buy Bonds?
The simplest answer is just to go to your bank and ask them about their savings account. After all, a savings account is a type of bond, except that it is not sold on the open market. There are other places you can buy bonds, such as online brokerages or even directly from the government.
Once you know where to buy bonds and how to buy bonds, the last thing you need to know is how to keep your bonds safe. If you plan on keeping your bonds for a long time and don’t mind buying a lot of them, you can keep them at your bank. But if you plan on selling them, you should probably keep them in a safety deposit box
As with most investments, you want to make sure you buy bonds at the right time and that you can afford to lose the money you spend on them. A bond is like a contract: when you buy a bond, you agree to give a loan to someone—a company or the U.S. government—for a certain period. In return, they pay you interest, just like you would pay your mortgage or car loan.
Before You Invest…
Investing in bonds is a great way to diversify a portfolio and generate income, especially for retirees. However, as an investor, you need to carefully consider your investment objectives, time horizon, and risk tolerance before you invest in bonds. (The below is a paragraph from another blog post, but I found it directly relevant to this post) Fixed income is important to many investors because of the income they provide. A bond is an instrument that represents a loan from an issuer—a company or government. When you buy a bond, you are lending money to the issuer that promises to pay you interest and eventually return your original investment.
“Prices of bonds fluctuate with the market, so you should consider the value of your bond investment in relation to its worth when you bought it. This is known as the book value of the bond. Interest rates fluctuate, too, which is why you want to monitor the current interest rate environment. When interest rates are dropping, it is good to buy bonds since their book value will increase over time.”