The first step anyone needs to complete before becoming any kind of investor is a good, thorough soul-searching. This always applies to any investment, since all investments involve some degree of risk. The investor takes on the risk with the expectation of increased reward. It will do no one any good to own any form of investment if it is a constant source of worry and concern. An investment is supposed to provide peace of mind for the investor's future financial freedom, not induce insomnia, anxiety attacks or indigestion.
After the potential investor has decided the risks are worth the rewards, the next step is research of the high yield funds market. This market is also called high yield bond funds and junk bond funds. Whenever returns are quoted as yields, it is a bond fund. The research will help investors learn why these funds are also called junk bonds. High yield or junk bonds are invested in bonds that are not rated as investment grade bonds. The bond issuers are experiencing dire straits in their own business or their entire industry is in an economic slump. The bond rating agencies adjust a company's bond rating similar to an individual's credit rating.
When business is good and all the creditors are paid on time, the company receives a high rating designating it investment grade. This is the highest rating a private bond issuer can receive. When business slows down and the company's debtors are slow in paying for their services, the company may have to seek out more credit and delay payment to creditors. When this happens the company's bond ratings drop below investment grade and become junk bonds. Since most bond investors are more risk averse than stock investors, investors avoid junk bonds. This lack of demand on the bond market causes the current price for the bonds to drop. When a bond is issued it is sold for $1,000.00 at a preset yield. If it is a 6 per cent bond, it pays $60 annually in quarterly payments of $15. These $15 quarterly payments are legal obligations of the bond issuer. The payments will be made until the bond is redeemed, even if its rating slip to high yield bond status.
When this price drop occurs, high yield fund investors notice. If the bond's current market price drops from $1,000.00 to $800.00 the yield goes from 6% to 7.5%, a 25% increase, hence the high yield label.