Understanding What Bonds Are

Companies can issue bonds instead of selling ownership in their company by issuing shares of stock. They borrow money from investors in order to issue the bonds. An investor purchases the bond directly from the company for a certain dollar amount in cash. The company then uses this money to build a new plant, make a new product, or fund any new venture that the company might have. The company will then set a date to pay back the loan at a later date.

The investor that has bought the bond has a few choices. The investor can choose to keep the bond until it matures, or they can sell it to another investor if they choose. Bonds change hands a lot of times from investor to investor before the bond will mature. This is viewed as less risky by some investors.

Bonds are also used to protect portfolios. Generally when stocks may be going down, bonds historically have went up. This is an important factor that people need to consider for their portfolio. If your stocks are losing value, then you can look to your bonds to outweigh the downside with the stocks.

You will want to look at the credit rating for the issuer of the bond. This will help you determine the amount of risk associated with the bond. If the company has credit problems or not enough capital, they may miss interests payments on the bond, or may not be able to pay it back. This leads to companies that have lower credit ratings to have to pay more in interest to get investors to invest in their bonds. Make sure you check their credit rating before you consider buying into them.

Depending on how much you have to invest and where you are in your investing career, you can choose more risky investments for a chance at a higher return. This is a great way to make some extra money. On the other hand, if you choose to invest in only steady bonds, you can expect a smaller return. You might be able to sleep at night better if you choose a less risky route.

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