Title: Investing In Bonds - How Is It Done And What Are The Risks?
Tags: investing bonds
Blog Entry: Many people today hear about how they should be investing in bonds for safety in these volatile markets. The problem for many people is bond investing is a bit more confusing to the average investor than stock and mutual fund investing. We found an article that does a great job explaining the ins and outs of bond investing and have published it below. Stocks and bonds. Doubtlessly, you've heard of them, and if you have been reading my articles, you know what they are. If you have not been, you should! But here is a quick update: stocks represent a portion of ownership in a company, and a bond represents money that a company "borrowed" and has to pay back on set dates. You might have heard that bonds are "safer" to invest in than stocks, but is this true? How are bonds traded, and what are the differences between a stock market and a bond market? Hopefully, this article can put these questions to rest. Unlike the stock market, bonds markets do not usually have a centralized trading system. Instead, bonds will be traded in decentralized, dealer based over the counter markets. When an investor buys or sells a bond, the counter party to the trade is almost always a bank acting as a dealer. Another difference between bond markets and stock markets is that sometimes investors don't pay broker's fees to dealers with whom they buy or sell bonds. Instead, the dealers get their money by collecting the spread, which is the difference between the price at which the dealer buys a bond from one investor and the price at which he sells the same bond to another investor. In terms of volatility, bonds are usually somewhat safer than stocks, especially short and medium dated bonds, but the value of stocks can definitely change. Bonds are liquid - it's fairly simple to sell a bond investment, and the safety of a fixed interest payment that you will receive twice a year is attractive. Bondholders additionally enjoy certain legal protections: in the United States if a company goes bankrupt, its bondholders will be paid before stockholders because they are creditors. On the other hand, bonds also come with their risks. Fixed rate bonds are subject to interest rate risk, which means that their market prices will shrink in value when the interest rates rise. Bonds also can be subject to other risk factors such as call and prepayment risk, reinvestment risk, event risk, liquidity risk, credit risk, inflation risk, yield curve risk, volatility risk and sovereign risk. A bond that undergoes a price change can additionally affect mutual funds that hold these bonds immediately. If the value of the bonds in a trading portfolio has plummeted over the day, the value of the portfolio will also have fallen. Finally, even though the money will go to them first before shareholders, in the case of bankruptcy there is a hierarchy of creditors that must be paid that bondholders are not on top of, so there is no guarantee of how much money will go to repay the bondholders. Bondholders have been known to lose some or all of their money when this happens. Mallory Megan works for Rapid Recovery Solution and writes articles on nationwide collection agencies .
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