You will need to understand the credit rating of bonds before you invest in them. It is good to learn as much as possible about what you want to invest in. This will give you more power over your strategy. You have probably heard on the new about credit ratings and such for bonds. There is a popular term for bonds that are called junk bonds.
There was a gentleman named Micharl Milken who sold junk bonds that were very high risk. He called them junk bonds and sold them to investors. What he failed to explain to them was that there was a very high chance they would default. Most of them eventually did go into default. There were many investors that lost a lot of money investing in something they didnt understand. When the investigators found out about the junk bonds, they found that high pressure bonds salesmen were at the root of this. They did not explain the high risk of the investment and just confused the investors. There were even a couple of salesmen that went to jail over this scandal.
You should think of bond ratings as a bonds report card. There are bonds that can earn triple A ratings that are the best you can get. There are also bonds that earn BB plus ratings, that are junk bond ratings. Its the same as personal credit. If you have bad credit, then you will pay more in interest for your loan. Its the same with companies that have bad credit ratings. They have to pay more for loans if they need money.
Companies credit ratings are used to judge if they will be able to repay the debt. You can look at these credit ratings online if you so choose. Some of the companies that rate bonds are Moody’s, Standard and Poor, and AM Best. There are others, but these are the most popular and widely known. You can also ask your broker for these ratings before you place any trades on a company. They will be more than happy to provide them for you. If they tell you that you don’t need them, then you know to probably start looking for a new brokerage firm to work with.