Companies can raise money in the market by either issuing stock or by issuing debt instruments known as bonds. While stock is the transferring of some bit of the ownership of the company to stockholders, bonds do not convey any ownership to the buyer, but are just loans which the company seeks and is bound to pay them back to the buyer on maturity along with some amount of interest. While stocks are a more fruitful investment in the longer term, there is also the fact to consider that market fluctuations may cause your stock to depreciate and in the event of a market crash, you could end up losing all your money. Bonds on the other hand will put you into the category of ‘creditor' to the company or government; they are bound by law to return your money with the accumulated interest like any other loan. Bonds are ideal investments for those who are looking for long-term fixed gains, such as retired people, or for those looking for some short-time specific funding, such as say financing an education in 3-4 years' time. Read on below to see how you can begin investing in bonds.
Common terms to be aware of. Before you begin buying bonds, you should be aware of some of the more common terminology related to bonds, which will help you make the right decisions when it comes to investing your money.
- ‘Face value' or ‘par value' or ‘principal' is the amount you will get back on maturity.
- ‘Coupon' refers to the interest rate a holder will receive during the period the bond is valid.
- A bond's price fluctuates through its life-span depending on various factors. When the price is greater than the face value, the bond is considered to be selling at a ‘premium'; when the reverse is true, i.e. when it is trading below the face value, it is said to be selling at a ‘discount'.
Where to buy bonds. You can buy bonds through full-service or discount brokerages. Other ways of buying bonds can be through bond brokers, but you will be required to make an initial minimum investment of $ 5000. A fourth way is to buy into mutual funds which primarily invest in bonds.
Buying government bonds. The government - state and federal - issues bonds as a means of securing funding for public infrastructure or other projects. Government bonds can be bought through the four methods mentioned in step one or they can also be purchased directly from the Treasury. Visit http://www.treasurydirect.gov/ to buy bonds from the government.
Cautionary tips. When buying bonds through brokers, remember to check the actual trading price of the bond against the price the broker is quoting. In most cases, brokers add a certain mark-up which they take as their commission or fees. Research well before investing in any non-government bond issues; they can also be subject to various market fluctuations. Government securities are safest since your return is guaranteed.
You should now have a basic understanding of how to buy bonds and make them into a life-long investment. Start slowly until you build sufficient experience and practice, then experiment with the varieties of bonds available in the market.