Investing your spare cash in the volatile stock market can be a scary thought for a new, inexperienced investor. Learn all about bonds, and how to find the best investment bonds for you. Discover more with PDNET.
In this article we’ll learn about investment bonds, including:
- The meaning of a bond
- Different types of bonds
- Grading bonds according to the risk factor
- Pricing bonds
- Pros and cons of investing in bonds
- How bonds are bought and sold
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What are investment bonds?
A bond is a signed agreement that recognises a debt. They are a tool that governments and companies use in order to raise funds. When a person buys a bond, they will receive a certain amount of interest and their money back at a pre-arranged date in the future. Bonds are a popular investment as they are considered low-risk, and the investor is sure of the amount of money that they will receive from their investment.
If you are to invest in bonds profitably, then you will need to understand the different types of investment bonds that you can invest in. Companies, as well as governments, can issue bonds and they will be classified accordingly. Corporate bonds are those that are issued by companies, and government bonds are those issued by governments.
Government bonds are considered a less risky investment. This is because the likelihood of a government collapsing and not repaying its investors is less likely than a corporation. They can be dated long or short term, but the longer-term bonds will have higher yields as a reward for investing your money for decades.
When a person invests their money in corporate bonds the yields are always higher. The chances of a company defaulting on their repayment through its collapse are higher than that of a government. For taking this risk, the investor will get a better return than from a government bond.
Bonds are graded according to their risk factor
When you are thinking of investing your hard earned cash in bonds, you must know how risky your investment will be. As a guide, bonds receive a grade according to their risk factor. Investment grade bonds come with a rating of AAA to BB. This allows an investor to choose the amount of risk that they are prepared to take for a higher profit. Governments and blue-chip companies issue these kinds of ratings. However, before choosing investment bonds, it’s vital that you understand the bond credit rating system to make a calculated investment.
So what have we learned so far?
- A bond recognises a debt and is issued by a corporation or a government
- Government bonds are less risky and pay a smaller dividend
- Corporate bonds pay a higher yield and can be riskier than government bonds
- Bonds have a grading system to indicate their risk factor
- Before investing in bonds, it is vital to understand the grading system
How are different kinds of bonds priced?
As with all kinds of traded securities the prices of bonds go up and down. Successful investors focus on the bond’s yield, which is the amount of interest that the bond earns. The cost of the bond and its yield are contrarily connected, meaning that when the bond’s price rises, the yield falls and the opposite way. By understanding this connection, you will be better able to choose the right bonds for you depending on their potential profitability.
What are the pros and cons of bond investing?
When you invest in bonds, you will know how much you will get in return, unlike stocks and they are less volatile than shares. Bondholders receive payment before shareholders. Bonds have a credit rating which allows an investor to assess the risks better. However, a more significant investment is needed to make good gains, and the yield is lower than a stock investment. Bonds can be less liquid than stocks and are sensitive to changes in interest rates.
How are bonds bought and sold?
Bonds can be bought directly from the company or through a broker who trades on the London Stock Exchange. The Exchange has protective measures for investors so buying through a broker is safer. Investing in bonds can be confusing for first-timers and a bond fund managed by a professional is sometimes a better way to invest. The key to earning money is through the timing of the buying and selling so investing through a bond manager who knows the markets can be a good idea.
Conclusion – Investment Bonds
Investing in bonds is less risky than in stocks and shares, but the profits are lower to reflect this fact. Before investing in bonds, it is essential to fully understand how the market works. Using a bond manager to help and advise you on your first investments is a very good idea until you know what you are doing. If you like the idea of bond investing, then it is a good idea to do more research and seek professional help before investing money. Don’t fall into the trap of a bad investment which can lead to loans for bad credit direct lenders.