Many investors understand stocks but for bonds, they don’t have as good of an understanding and why you should have them in your portfolio. So here’s a crash course on Bonds.
Difference between Stocks and Bonds
With Stock, you are an owner in a company. You are sharing in the profits and losses of the company. With Bonds, you are a Loaner. You are loaning money to a company and in return the company will pay you a rate of interest.
Many people are familiar with CD’s. You loan money to a bank and they pay you interest each year. At some point your CD matures at the end of the term.
Bonds work very similar. You loan money usually in $1,000 increments and they pay you interest, usually semi-annually, and the bond has a maturity date. At that time, the company pays you back your $1,000.
The return you are expecting with a bond is the interest rate the company is paying. The interest rate will vary based on the maturity date, as well as the credit rating of the company. The longer the period of time that you lend money, you should expect to receive a higher rate of interest to committing your capital. The lower the credit rating, the higher the risk. With higher risk, the interest rate will be higher to try to compensate for that risk.
There are many types of bonds:
- US Government
- Foreign Governments
- Corporate Bonds
- Municipal Bonds
An additional point of difference between stocks and bonds:
The reason you invest in bonds is for cash flow in the form of the interest paid as well as the stability they provide.
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Date Posted: 09/26/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.