Bond Market Investing
Choosing bond market investing can help to balance out your portfolio, especially during an unstable market. In most cases, a diverse portfolio offers less risk and more competitive returns than a portfolio that consists solely of stocks. Before you do any bond market investing, it's important to understand what bonds are, and how they operate.
When you buy a bond, you are effectively loaning the issuer money, with the agreement that the loan will be repaid with interest within a certain amount of time. The type of bond issued will vary, according to the entity who issued it. For instance, the federal government issues Treasury bonds to pay down the national debt and to pay for various other government programs. State and local governments sell municipal bonds to pay for new schools, roads, and other project, and private and public corporations sell bonds to encourage the growth of their businesses. Bonds pay out interest, at an issuer-set rate.
Bonds can take up to thirty years to mature, and on the maturity date, the bond is due and has to be repaid. Zero-coupon bonds are sold at a discount and at maturity they are redeemed for their full amount. Although the maturity amount isn't guaranteed, some investors like to deal exclusively in zero-coupon bonds because they have a rough estimate of what their investment will be worth. Varying kinds of bonds have different risk levels- higher risk bonds will usually come with a commensurately higher interest rate. Common risk factors include maturity time, credit risk and inflation risk. US Treasury bonds are the lowest risk, because they are backed by the federal government. Following those are mortgage-backed bonds, municipal bonds, corporate, international, and high yield bonds.
Until a bond reaches maturity, it can be sold and bought. If it's changed hands, the price can fluctuate depending on the prevailing interest rate. For example, you buy a $10,000 bond at 4% interest. Three years later, similar bonds are sold at the same price, but with 6% interest. No buyer will want your lower-interest bond, so you'll have to sell it at a loss if you want to sell it at all. Bonds market investing is beneficial because it augments the stocks in your portfolio, and bonds also respond differently to market conditions than stocks. However, diversification is not a sure way to profit, or to protect against losses. While bonds are not without risk, it can safeguard at least your initial investment if you hold it to maturity. Bond market investing is a good way to get some residual cash flow going, because they pay interest regularly. If you want to branch out a little, try the bond market today.