Pros and cons of investing in bonds

The stock market is a crazy business as many of know. We constantly hear about how much it has fallen in a single day or how much it might have shot up. Often the reports seem dire for this or that company. Investors can loose thousands of dollars in one afternoon trading on the New York Stock Exchange. Many of us would like to get involved in investing but we know that this is a dangerous business. It's great to have a system where our money can grow without any work on our parts, right?

The answer is both yes and no. It is also an illusion to think that everything in the stock market occurs without any work. When someone makes a living from stocks or bonds they have probably carefully researched what they are doing. There's plenty of luck involved but also lots of skill and good judgement. Most of us don't have that skill, just as we might not be able to play the piano or paint a picture. Is it hopeless for those of us who have not spent years studying the market? Probably not. However, this does not mean that you should not get some sort of basic education about the parts of the market. You have no doubt heard of stocks, but you might also have heard of an important investment called a bond.

A bond is a security offered by the government, an agency, or a corporation to sellers. When you purchase a bond the company or issuer essentialy takes out a loan from you. Like all loans, the bond has a particular interest rate set by the federal government. Over the period of the bond's existence (usually three to five years) the interest accrues. When the bond comes due the issuer must pay back the principal, the interest, and possibly some sort of premium.

One of the benefits of investing in bonds is that they might be a little more secure than stocks. Stocks fluctuate a great deal on a day to day basis, while ideally bonds stay a bit more stable and are gauranteed to be paid back. Another benefit with bonds is that they can diversify your investments portfolio. Investors know that investing in just one thing can be disasterous. If you put your life savings into just a few stocks you could loose it all tomorrow. By investing in many different things you decrease the chances of loosing it all at once. You might loose a small investments, but others might pay off, helping to secure your wealth. Investing in both stocks and bonds can thus be a very wise investment decision.

The downside of bonds is that they can sometimes produce loses depending on what the interest rate is doing. Unless the interest rate is set on the bond it might fluctuate, meaning that you would either not make as much money as you thought or might actually loose some. When the interest rate drops the price of the bond is forced down, meaning that if you haven't accrued enough interest at that point you might loose money.

Long term bonds also tend to be volatile and might not stay with the inflation rate. Like all investments you should carefully research the bond and make sure the deal is good. Do the math and make sure that it is a sound idea. Realize that all investments are risky and might loose your money. Don't invest money that you know you will need in the near future. Only invest what you know you can loose.