Seasoned investors know the importance of portfolio diversification. Bonds investment generate income and are commonly regarded as less risky than stocks.
What are the different kinds of bonds investment?
Bonds are a way for governments or companies to borrow money from investors. They are also called “fixed income instruments.” Most of the time, bonds are sold to raise money for certain projects. In exchange, the bond issuer promises to pay back the investment with interest after a certain amount of time.
Some bonds, like corporate bonds and government bonds, are rated by credit agencies to help figure out how good they are. These ratings help investors figure out how likely it is that they will get their money back. Most of the time, there are two main types of bond ratings: investment grade (higher rated) and high yield (lower rated).
Corporate bonds, municipal bonds, and Treasury bonds are the three main types of bonds:
Corporate bonds are debt instruments that a company sells to raise money for things like growth, research and development, and new products. When you buy corporate bonds, the interest you earn is taxed. To make up for this, however, the interest rates on corporate bonds are usually higher than those on government or municipal bonds investment.
Municipal bonds are issued by a city, town, or state to raise money for things like schools, roads, hospitals, and other public projects. The interest you earn on municipal bonds is not taxed, which is different from corporate bonds. Municipal bonds come in two types: general obligation and revenue.
General obligation bonds are a way for cities and towns to pay for projects that don’t make money, like playgrounds and parks. General obligation bonds are backed by the full faith and credit of the issuing municipality. This means that the issuing municipality can do whatever it takes, like raising taxes, to make sure the bonds are paid back.
On the other hand, investors are paid back with the income that is expected to come from revenue bonds. For example, if a state sells revenue bonds to pay for a new highway, it would pay bondholders with the money from tolls. Federal taxes don’t apply to either general obligation bonds or revenue bonds. Often, state and local taxes don’t apply to local municipal bonds either. Revenue bonds are a good way to make money and invest in a community at the same time.
Treasury bonds, also called T-bonds, are issued by the government of the United States. Treasury bonds are risk-free because they are backed by the full faith and credit of the U.S. government. But interest rates on Treasury bonds aren’t as high as those on corporate bonds. Treasury bonds are taxed by the federal government, but not by state or local governments.
Advantages of Bonds Investment
Here are some of the biggest reasons why bonds are a good way to invest.
Fixed income comes from bonds investment
Bonds, unlike traditional stocks, give investors a fixed income that they can count on. In any given year, the stock market could go up or down 20%, but bonds will always pay the agreed-upon interest. This interest is important for investors who want a guaranteed income in retirement or who want to keep their capital safe.
Bonds investment Are Safer Than Stocks
Bond returns don’t change with the ups and downs of the stock market. So even when the market as a whole goes down, bonds still make money. Bonds can be a good way to spread out your investments and lower your overall risk.
Disadvantages of Bonds Investment
Bonds investments don’t always help you reach your financial goals. Here are some of the ways they can hurt you.
Less money than stocks.
The main problem with bonds is that even though they are safer than stocks, they offer less money in return. In the long run, stocks have historically done much better than bonds. So, bonds investment are a good part of a well-rounded investment portfolio, but they probably shouldn’t be your only investment. Forbes says that the average return on large-cap stocks from 1926 to 2018 was 11.9%, while the average return on bonds was less than 4% during the same time period.
Businesses can go bankrupt.
Bonds are also bad because they are only as good as the creditworthiness of the company that issued them. Some corporate bonds, especially junk bonds, are riskier than Treasury bonds. There is a chance that the company will go bankrupt, which could mean that you won’t get the promised interest or even all of your money.
Where do I find bonds to buy?
Stocks are traded on a centralized market, which means that all trades go to one exchange and are bought and sold at the same price. Bonds are not traded on an exchange like stocks are. Bonds, on the other hand, are not traded through stock exchanges. Instead, they are bought and sold through brokers. U.S. Treasury bonds can be bought directly from the government, though.
Bonds aren’t traded on a single market, so it can be hard for investors to know if they’re getting a good deal. If one broker sells a bond for more than its face value (to make a profit), another broker may charge an even higher premium.
The Financial Industry Regulatory Authority (FINRA) regulates the bonds investment market. As soon as the information is available, FINRA posts the prices of transactions. But the data may be behind the market, which makes it hard to know what a fair price is when you want to invest.