Written by Charlotte Wood (last updated February 21, 2009)
The world of investing is easily a confusing and complicated one, one that many just don't quite understand. Bonds however are not too hard to understand once you know the basics and once you know exactly what a bond is, it will be easier to understand the benefit of investing in bonds and how to go about doing it.
A bond is essentially a loan from you to what's called an issuer. The issuer can be anything from a corporation to the government and for your investment or loan, the issuer promises to pay you back your money with a specified interest rate at a later date. Think of the savings bonds you received from your grandparents or the war bonds Americans purchased during WWII; you loan money to the government and later you redeem that money with interest. With bonds there is a specified date you can redeem them and during that whole time they earn interest. The issuer can use the money for whatever they need to and you will be paid back when the bond matures or comes due.
So why should you invest in bonds? Apart from the wisdom in having diversified assets, investing in bonds is relatively safe. You are guaranteed steady payment and steady interest income. The risk with bonds is significantly lower than other types of investments. Whether you're saving for college or retirement or what have you, bonds are usually a safe way to go when it comes to investments and earning a dependable interest income.
When investing in bonds there are a few things to consider. Interest rates first off, have a few different options attached. You can go a safer route and buy a bond with a fixed interest rate that pays out periodically or you can opt for an adjustable rate. The latter is more of a risk, but the interest rate could more closely follow the market.
This works in your favor if the market is doing well because then you'll be earning higher interest than if you settled on a fixed rate, but if the market takes a downturn you'll wish you agreed to a steady, fixed percentage. There are also various redemption features to consider when investing in bonds. Different redemption options include call provisions and puts.
If you want to invest in bonds, there are a few ways to go about it. Especially if you're new to investing, you may want to consult an investment counselor who can help you get set up with your bonds and so forth. They will be able to help you pick what kinds of bonds you should invest in and help you make further decisions regarding the interest rate, the term, the redemption method, etc. As an investor you can also buy or sell bonds yourself, but that takes a bit more experience if you want to be successful.
Investing in bonds is a good way to build up your investment portfolio, one that is stable, and one that will reap pleasing rewards. They're not too difficult to understand and once you know the basics you shouldn't have any problem diving on in!
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