Bonds – What They Are and How They Work
One of the most popular forms of investing is in Bonds but, for the uninitiated, bonds are somewhat of a mystery. This Blog article aims to change that with some basic info about what Bonds are, how they work and what they can mean for the average person’s portfolio. Take a look and we’re sure that when you’re done you’ll not only know a lot more about Bonds but in fact be ready to go out and find some to invest in. Enjoy.
The best way to explain what a Bond is and how it works is by example. When any business begins the founders usually have money that they will invest into it called capital. They use this capital to open the business and begin taking care of customers. If what they are producing or the services that they have are successfully marketed in time they will need to expand but, in many cases, the money needed for the expansion isn’t sufficient. It is at this time that many companies will decide to issue bonds and this is when citizens like you and me can start purchasing them.
The reason to purchase is simple; the company promises to not only pay the money back that you paid for their Bonds but also, at certain agreed upon times and intervals, they will also pay extra payments in the form of interest. In this way Bonds are different from stocks because when you own stock you actually own part of the business. When you buy bonds you are promised to be paid back what you paid in and also get interest but you will never actually own anything. The business has simply borrowed your money to expand, as if you were a bank.
The reason that anyone would want to purchase bonds over stocks is because, even though they may not make money as quickly or increase in value as much as stocks, they have some other traits that are very attractive.
Bonds offer capital preservation. What this means is that the money invested is very safe and, unless the company goes completely bankrupt, the investor will get back their original investment and much more.
Bond owners will get an interest payment regularly over the entire time that they hold the bond. This can be very helpful for retired persons as they get money at regular intervals and is also great for people who need regular cash flow.
Bonds can carry a big tax advantage, especially when they are issued from the federal or state governments or a municipality for the building of roads, bridges and other infrastructure. If you’re retired this can help minimize the total amount of taxes you owe every year.
As you can see Bonds are not only safe but very effective and offer benefits that are very advantageous, especially to retirees. It is for those reasons that any person looking to make some safe long-term investments should investigate Bonds as much as possible and include them into their well-rounded portfolio.
Filed under: Investing
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