A Bond is a Loan of Sorts
A bondholder loans money to an individual or business entity (the issuer) and receives interest on that loan until the bond matures. At that point, the issuer repays its debt, which includes principal and interest, to the investor.
A bondholder must be willing to take certain risks to earn this return on investment. Suppose a loan default or some other adverse event occurs concerning the issuer’s ability or intent to repay its loans or even just a decline in revenues due to bad economic conditions. In that case, investors holding bonds from that company or government entity could lose money.
Bonds are Often Less Risky than Stocks
Stocks and bonds are two types of investment vehicles that you can use to build your wealth. Stocks provide a share in the ownership of a company, while bonds are IOUs from companies or governments that pay interest and principal back to you over time. Both offer different levels of risk and reward, but one thing is sure: Bonds tend to be safer than stocks in terms of performance. While there is always the chance that your stock will lose value, the possibility of losing money on a bond is much less likely unless it defaults.
Furthermore, bonds tend to be more predictable because they have fixed maturity dates when they pay out their face value to investors at maturity instead of fluctuating with market conditions as stocks do.
Bonds are One of Three Ways for Investors to Own a Share in Companies
Stocks, bonds, and cash are the three main ways investors own company shares. Stocks are shares of ownership in a company; bonds are loans made to a company; and cash is money sitting in your bank account.
Bonds have several advantages over stocks: they are less volatile than stocks. They offer higher yields on average, meaning you get paid more interest on them than you would on most other investments like CDs or savings accounts.
Diversifying Your Investments Can Help Mitigate Risk
When you invest in a single asset class, you take on more risk than if you diversify by investing in several different asset classes. While diversification is not guaranteed to always work, it can effectively mitigate some risks associated with investing in just one type of security.
Diversifying also allows investors to gain exposure to different types of assets with varying levels of volatility, which helps them manage their portfolio’s overall risk profile and achieve their investment objectives over time.
Most bonds fall into two categories: government bonds and corporate bonds. Corporate bonds are backed by the company that issues them, while government bonds are endowed by their respective governments. While there’s a lot of overlap between the two categories, there are some crucial differences you should be aware of before investing in either type of bond.
Some corporate bonds are also available through banks, but most investors buy them through mutual funds or exchange-traded funds (ETFs). The yield can vary widely depending on factors like maturity date and interest rate structure, so it pays to know what you’re getting into before committing any money.
You can Purchase Bonds Through the U.S. Treasury and From Major Brokerage Firms
This online service lets you buy and sell individual treasury securities in denominations as small as $50 per bond up to $100,000 per transaction (subject to certain restrictions). You do not have to own an account with a broker or bank to buy bonds through this method; however, if you want to transfer funds from another institution into your account at Treasury Direct for purchasing purposes, then that would require opening an account there first (or link your existing account).
Bonds Offer Stable, Predictable Returns and Aren’t as Complicated as Stocks
Bonds are a great way to invest for the long term. They aren’t as risky as stocks and offer stable, predictable returns. Bonds can be an excellent way to diversify your portfolio and are an easy way to protect yourself against volatility in the stock market.
When you buy bonds, you do so through an investment broker or financial advisor. You can also purchase them directly from companies selling bonds (called “directly-issued” bonds).
Conclusion
The most important takeaway is that bonds are not as complicated as stocks. They’re simpler because they share some of the same characteristics, such as maturity date and coupon rate. But there are also a lot of nuances that make them unique and exciting investments. If you have questions about how to get started investing in bonds, we can help you out!
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
