Investing in bonds is just like investing in stocks. Investors need to realize that investing in bonds entail risks which could affect the values of bonds. The major risk of investing in bonds comes from the concern about the issuers’ ability to meet its scheduled interest and principal payments. If you are investing in bonds, it is important that you adhere to the following investment principles:
* Know yourself and your goals
* Match the maturity length of your bonds with the investment time horizons of your goals.
Bonds are an excellent option if you’re looking to bring in a steady income with the potential to beat inflation. Bonds represent money owed to you, with a (usually) specified amount of interest, so bonds are generally lower risk investments than stocks. Bonds are rated on a scale that ranges from AAA (the best) down to D (in default). Bonds rated Baa (think of it as B++) are at the low end of investment grade and, all other things being equal, should pay a higher interest rate than bonds rated AAA (a rating reserved for US government bonds and the bonds from a very small number of the most financially stable companies).
Bonds are sold with a face value, that represents the original value and price of the bond, as well as a pre-determined interest rate. Bonds are usually issued in $1,000 increments or notes. Bonds are not designed to produce capital growth, although they can generate a little, so these investments are not really suitable for investors seeking high returns.
Bonds pay income that can be fixed or floating, and the payments may be made periodically or at maturity. Bond maturity refers to the specific future date on which the investor’s principal will be repaid. Bonds offer fixed interest payments at regular intervals and can act as a hedge against the relative volatility of stocks, real estate, or precious metals. Bonds or other types of fixed income investments provide diversification and predictable income and are generally thought of as more conservative investments than stocks. Bond risk factors Although many bonds are conservative, lower-risk investments, many others are not, and all carry some risk. Bonds that sell below face value are said to be trading at a discount.
Investing in bonds may not be as exciting or as potentially lucrative as madly fluctuating stocks and funds, but they limit risk and offer stability and predictability,and are an essential part of a balanced portfolio.
Investing in bonds requires a good sense of initiative when it comes to observing the market trends. Many people want to see an immediate return on their money and if you are
investing in bonds that just isn’t likely to happen.
