Bond Trading

Bonds are debt instruments used by companies and organizations for raising funds. As large corporations and companies require more money than they could borrow or obtain from a bank, they turn to bonds to get the funds needed. The public market has the opportunity to invest or buy the bond with the assurance that they will earn interest on the bond over a period of specified years. This enables the company or organization to get the funds needed while the investor is assured that he or she will earn interest plus the principal of the bond when it reaches maturity. Essentially, you may think of bonds as loans to companies or other organizations in which you are the lender and the company that sells the bond is the issuer.

There are four major components to bonds and these must be understood before an investor can begin successfully bond trading. The face value, or par value , is the principal of the bond. This indicates how much the bond holder will get when the bond reaches maturity. Though it may seem that the holder will get the exact amount he or she invested in the bond, this isn’t the case. When a bond reaches maturity it may be trading above or below the bond’s face value. The interest rate paid to the bondholder is the bond’s coupon and it is important to know what the interest rate or coupon is when bond trading as this indicates how much you will make while the bond matures. Most bonds pay interest rates in two payments, but it is possible for them to pay once per year or even quarterly.

Maturity refers to the time it takes before the borrower pays back the investor’s principal. Bonds may be sold with various maturities. Choosing the best maturity rate for your financial portfolio will have a direct impact over how much you earn through bond trading. The company or organization that issues the bond is referred to as the issuer. When choosing bonds be sure to compare the histories of various issuers and choose a bond that is from a stable and secure company or organization.

Bond trading provides many benefits to investors but the biggest advantage of all is that the investor knows when he or she will receive his investment (principal) back as the bond is traded with the date of maturity. Since investors have a set or fixed date that they will collect the principal, bond trading is known as a fixed income security means.

Before an investor decides to begin bond trading it is essential that he or she understands the inherent differences between stocks and bonds. Stocks are a means for an investor to become a co owner in a company. By purchasing stocks, investors (stockholders) gain many benefits and earn voting rights as they become part of the company’s board of directors. These types of voting activities are often accomplished through the mail and do not require that an investor is physically present at meetings. Stocks are also known as equity.

As stocks are equity or represent an investors partial ownership in a company or organization, bonds are not equity but rather are instruments of debt. Debt is defined as the amount or sum of money that is borrowed between two organizations or parties. Debt is a financial tool used to purchase items the party would otherwise be unable to afford. When choosing between stocks and bonds it’s important to realize that bonds have lower risk involved but stocks have greater rewards.

Many prefer to invest in bonds, rather than stocks when they are saving or investing for their retirement and can’t afford to lose money. Stocks carry more risks and for those who are older or saving and planning for retirement, the risks associated with stocks simply aren’t worth the investment. For this reason, many retirees and those planning for retirement that are living on fixed incomes prefer bond trading over stocks.

Since bonds carry less risk than stocks they are wise investment choices for those who need to invest money on a quick basis with minimal risk. Consider bond trading if you need money within a few years and can’t afford the gamble of the stock market.

Many financial experts agree that portfolios should be diversified while emphasizing playing the stock market and investing in equities during the early years as you can regain your losses and aren’t living on a fixed income as when you are older. Those who reach their forties to fifties should shift their investments from stocks to bonds as these are more reliable and carry less risk.