Basics of Bonds: What You Should Know Before Buying
If you’re interested in the different types of investing that you can do in order to make your money grow, then it’s worth your while to know about the basics of bonds and just what they can do for your portfolio.
It’s more straightforward than you might think, so you’ll be able to buy bonds with the confidence that you know exactly what you’re doing by the time you finish this page.
Does that sound good?
If so, then keep reading in order to learn more about the basics of bonds and what buying them means for your portfolio alongside investments like stocks and mutual funds.
What Are Bonds?
Put quite simply, bonds are an investment in an entity that act as a sort of I.O.U.
When you buy a bond from something like a business or a government agency, you are given the promise that you will be paid a certain rate of interest over the course of bond’s life in addition to a repayment of the face value of the bond.
Governments often use this money to fund their operations, businesses use the money that bonds bring in so that they can expand, and the buy gets some assurance that they will see the money the lent to the entity in question, in addition to a bit of extra money some time in the future.
There are different kinds of bonds, among which are:
- Us Government Bonds – These are also known as treasuries, because they are sold by the treasure department. These bonds have varying maturities and are free of state and local taxes on their interest.
- Corporate Bonds – These are sold by corporations through public securities similar to the way stocks are. While the normally carry higher interest rates, you run the risk of the company going bankrupt, whereas the government can just print more money.
- Municipal Bonds – These are issued by state and local governments and, like corporate bonds, have higher interest rates meant to attract buyers thanks to the face that these governments can go bankrupt.
Knowing what your options are is one of the most important steps you can take when it comes to learning about the basics at bonds.
And now that you know what bonds are all about, it pays to ask the question: Are bonds right for me?
And for that, we’ll look at the pros and cons.
The Pros and Cons of Bonds
Like any other kind of investment, buying bonds has its pros and cons. Here’s what you can expect if you decide to go ahead and buy some.
- Diversity – Diversity is always a good thing when it comes to investing, and bonds allow you to diversify your portfolio and add an element with a lower risk.
- No Middleman – Buying stocks often requires you to go through broker. There’s no need to with bonds.
- Low Initial Investment – Bonds are usually much cheaper than other types of investments, thus giving beginners a low coast way into the world of investing.
- Low Returns – One of the important basics of bonds that any investor needs to learn is that low risk equals low reward. Bonds don’t have the earning potential that other types of investments do.
- Missed Opportunities – Because your money is tied up in bonds, it’s possible that you might miss other investment opportunities. Whether it’s worth it is entirely up to you, but some investors prefer to put their money where they have the best chances of making the most money.
How to Buy Bonds
Buying bonds is as easy as going through your banks, or through a broker. You can also buy treasuries directly from the US treasury via Treasury Direct, which also provides you with a variety of resources concerning bonds.
Once you invest in the bond of your choosing, its simply a matter of letting the interest do what it’s supposed to and waiting until the bond hits maturity.
I hope you’ve found this information on the basics of bonds useful. As always, feel free to visit my other pages for investment and retirement resources and advice.