Investing Stocks and Bonds

Part of investing comes down to your ability to select good investments. Bonds and stocks are two of the most common investment terms that you will hear about. What is the difference between stocks and bonds? For beginners, stocks require you to take more risk where bonds are low-risk with guaranteed returns. To help you understand more about stock and bond investing, here is a simple guide:

A guide to bonds
Bonds are offered by the government, municipalities, or businesses. Search for high quality bonds as they come with less risk and almost always guarantee a return. Low quality bonds are offered by businesses that are looking to expand, so they will be able to offer a higher interest rate. In order to gain a higher interest rate, you need to invest in long-term bonds, which normally means you will invest your money for longer than 10 years. The other great thing about bonds is that many of them are tax-free as they are offered by the government or municipalities.

Bonds are wonderful investments as they help to protect your financial future from complete ruin when the stock market fails. With bonds, you are guaranteed some type of return and you know exactly when you will get this return. This allows you to have protection and something to use for retirement if your stocks didn't perform quite as well as you'd hoped they would. However, you cannot retire on bonds alone as they don't always provide a large interest rate. Unless you can sink $100,000 into long-term bonds, don't expect to get a large return back.

The one caution about bonds is that they tend to lose their value when inflation occurs. Always watch for interest rates and inflation and adjust your investments accordingly so you don't end up losing money during an economic crisis.

A guide to stocks
When it comes to stock investing, you can become a high-risk investor or a moderate to low-risk investor. Generally young people are encouraged to become high-risk investors as this means they are able to invest for a long duration in stocks that provide high returns. Being young, you are able to take a gamble with stocks once and awhile because you have a longer amount of time to earn back the money. Small companies that are just going public usually have more risk because there is no history about their performance. Before you invest in them, make sure you take the time to research the company and that you know if this company is going to be on the market for a long duration so you can figure out if you will make some money by investing in them. Mutual fund investments are the best way to go if you want low-risk investing. With mutual funds, your money will be spread out into multiple stocks. This way you are guaranteed to make some type f profit when the stock market isn't performing well because there will always be at least one stock that is holding strong.

As you can see, stocks and bonds are similar in that they both try to help you build a retirement. There is no way to predict what things will be like in the future, but it's a good guess to assume that things will be more expensive and interest rates will be higher. Be smart with your investing and choose Roth IRAs as this allows you to pay the interest on your retirement now so when you retire, the money is free and clear of any fees. Since you know the interest will be higher in 20 or 30 years, this can save you a ton of money.