Guide to Buying Bonds
Bonds – also known as fixed-income securities – are an investment tool that can yield a smaller, yet steady income. What are bonds? Most of you have borrowed money, whether it was a car loan, credit card, mortgage, or anything of the sort. This is the complete opposite of that. Bonds are when the government or a company needs help from the general public. Essentially, the investor who buys the bonds, or the lender, is loaning the company or government money, which makes them the borrower. In exchange for the bond, you are promised an interest fee, just as you would pay if you borrowed money yourself. After the loan has matured or ended, you will be repaid the amount you loaned.
Let’s look at some pros associated with bonds
- The interest rate is fixed, and does not fluctuate with the market
- The prices of bonds are much more predictable. While they do not always remain the same, they are far more stable than some other investment types.
- Bonds are fairly less risky than stocks
- Bonds are generally refunded before stocks, should a company go bankrupt
As always with pros, there are cons to consider as well
- If a bond has to be sold before maturity, you will lose money.
- There is a lower income with bonds than other investment types.
- If a company goes bankrupt or defaults, there is a possibility you will lose money
It can be a good idea to set up a separate bank account for your investments before you begin. There are different types of accounts that can help you earn the most money possible. Investment accounts can help you keep your everyday money separate from what you are earning extra. It is important to have your life settled financially before the onset of your investment career. To be out of debt, stable, and with emergency money set aside should be your main priority before buying bonds; this will keep you out of trouble later.
Next, you will want to decide if you want to tackle this alone, or hire a bond broker. Brokers are there to help you make smart decisions about your investments, and can really be useful if you do not want to put your time into researching. There are risks involved with this route, however, as they will charge commission or a fee, and there is always a chance of finding a less than honest broker. While this is rare, it can easily be avoided by using well-known brokers, or by doing research before hiring one. There is always the option, however, to go it alone. Bonds can be purchased at auctions, online, or other ways, depending on what type of bonds are plan to purchase.
Now to look at the different type of major bonds, and what they entail.
- Government bonds – also known as treasury bonds – are the most popular, and arguably the safest. Especially in well developed countries, the risk of default is very low, and the chances of losing money are very low. These are issued from the government itself. There are treasury bonds (a minimum of $1000 and 10 years), treasury notes (between 1-10 years), and treasury bills (less than 1 year). These can be bought directly from the government or a bank, or through a broker.
- Municipal bonds – or muni bonds, are similar to government bonds, and are fairly low risk. Instead of borrowing from the country, you are borrowing from a smaller scale, such as cities or other local governments. These are usually sold to fund community projects. Like government bonds, these can be bought directly from the government or a bank, or through a broker.
- Corporate Bonds – are the riskiest bonds, but often pay out the greatest interest. Corporations sell bonds when they are looking to fund a large project, expansion, or other high costs endeavors. Included in Corporate bonds are “junk bonds”. These are sold by companies most at risk of default or bankruptcy, so carry a higher risk, yet a higher reward. While these can be issued through your broker, or a bank, you can buy straight from the company itself.
As with any investment, it is crucial to do your research before risking your hard earned money. You should not only research the type of bond you wish to purchase, but the company if applicable. It is also important to decide how much money you want to invest. You can buy bonds at different prices, usually over $1000, but you may wish to go on a much higher scale. The more you put in, the more you get out; but never bite off more than you can chew. It’s also a good idea to spread the wealth, never put all your investments with one company. Now you can make an informed decision, and make the most of your investments.