Important Things to Consider When Investing In Bonds

 Debt financing is completely different from equity financing instruments. While playing the stock market is how the individual investor participates in major equity financing activities, buying bonds is one of the ways retail investors participate in the debt financing activities of corporations, states, or the government.

 With bond investing, you are technically lending your money to an institution, with the promise that you will be paid back. It goes without saying that you should perform your due diligence on these companies before you shell out a huge sum of money. You can conduct your own diligence investigations, or you can have experts such as Diligence International Group assist you so that you can rest assured that your money is safe. 

 Here are the basic things you need to know about bond investing:

 1. Bond Investments Keep Your Money Stored Away for a Number of Years

 In other words, you must be prepared to not liquidate the principal amount of the bond for a set period of time, or you may stand to lose money in the process. There are some bonds that incur penalties for withdrawing the money before its maturity date, so you would want to make sure that you can part with this money for a long period of time without needing it. 

 Bonds are typically kept for years – five to ten is the average. The longer you keep the money stored away without having to withdraw it, the bigger your interest earnings.

 2. Bonds Usually Yield Lower Returns Than the Stock Market

 Higher risks usually amount to higher returns. For the volatility that playing stocks gives you, you stand to gain more income. Bonds, on the other hand, are relatively stable instruments. The lower risk and volatility you face equates to lesser income compared to what you can earn playing stocks.

 3. Bond Investing is not Centralized

 Unlike the stock market’s transparency across all investors, the bond market operates a bit differently. The broker can play the terms, so that a bond that is offered to you can be priced differently with a bond that is offered to another investor. Here, you will have to do your due diligence and make sure you are not being taken advantage of, and that the price you are paying for the bond you are purchasing is fair.

 Given these elements, there are still a lot of advantages to investing in bonds. Here are some that will help you sleep better at night:

 4. Stability of the Instrument

 As mentioned, bonds are relatively stable instruments compared to playing the stock market. In playing stocks, fluctuations happen all the time, so remember that no matter how stable a company seems to be performing, or no matter the patterns that are seemingly present in the market, what you do and how you play is always a gamble.

 Bonds, on the other hand, will pay you the interest that was promised at the time contracts were signed. No matter what happens to the market, you are assured of a set amount of interest income.

 5. Higher Claim on Assets

 When a company goes bankrupt, equity investors or shareholders are last to lay claim on any liquidated assets. Debt investors – those who purchased bonds from the company – are prioritized in claiming any assets that are liquid from the company.

 6. Principal is Held Intact

 No matter the interest rate risks and fluctuations, your principal amount is always going to be given back to you. The only losses you can incur is the opportunity cost of playing with higher instruments. Other than that, your money is in safe hands and will be for the duration of your investment.

 7. Diversification to Your Portfolio

 Bonds may provide lower interest income compared to if you played stocks, but your losses on this more volatile investment instrument is made up for by the stability of your bond investments. The diversification of your portfolio by acquiring bond investments of great benefit to you, and helps keep a large amount of your money safe from more unstable investments.

 With all these things in mind, should you still invest in bonds? The answer is yes. There are many different ways you can earn more money by investing, but bonds have always been a stable source of income and a good way to diversify your portfolio. Bonds are a staple in any investment mix, no matter your net worth as an individual or a corporation.