Should You Choose Stocks Or Bonds?
March 26, 2009 by How Savings Bonds Work
Filed under About Bonds
The difference between stocks and bonds isn’t clear to those just starting in the wonderful world of investing. While stocks give investors part ownership of a company, bonds are loans made by investors to corporations or governments. Rather than benefiting from company profits the way that stock holders do, bond holders receive a fixed rate of return, a fixed interest rate. Bonds only last for so long and have a termination date called the date of maturity. Also, they can take decades to mature, whereas stock exchanges happen with lightning speed every day. If you are just looking to make a quick buck with high risk, go for stocks. In comparison, if you need stability, say, for a retirement, you might choose bonds.
1. Risks Versus Rewards
As hinted at earlier, stocks have a higher rate of risk whereas bonds are more secure. Of course to say bonds are safer than stocks doesn’t automatically mean that you will always make money on bonds. A bond is an investment – and as such it may not be paid back. US government bonds are considered to be the safest type of bonds. Blue chip corporations (those with established performance records that span over many decades) are also very safe bond investments. Smaller corporations have a greater risk of defaulting on their bonds, but if the business goes bankrupt bond-holders are preferential creditors and will get compensated first.
2. Trading Bonds
Traditionally, bonds were the exclusive trading realm of huge corporations and banks. Not any more – even a savvy investor can begin trading bonds with as little as $5,000. Bonds bought and sold after the initial issues are quoted in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.
3. Stocks Or Bonds?
Given what you have read so far, you might think that stocks are better for the short term and bonds for the long term, but the statistics do not lie. Bonds offer greater security and return on your investment than stocks, overall. The situation changes, however, when time spans of longer than 10 years are considered. The stock market has consistently outperformed bond investments by a large factor. This is because companies continue to increase in value and any short term fluctuations in the stock market become smoothed out. Overall, you should never put all your eggs in one basket – consider a bond as part of your portfolio to help cushion against market fluctuations. A mixture of investments is always the best choice.
Thanks to John Morris for contributing this article to our Bonds blog:
1. Risks Versus Rewards
As hinted at earlier, stocks have a higher rate of risk whereas bonds are more secure. Of course to say bonds are safer than stocks doesn’t automatically mean that you will always make money on bonds. A bond is an investment – and as such it may not be paid back. US government bonds are considered to be the safest type of bonds. Blue chip corporations (those with established performance records that span over many decades) are also very safe bond investments. Smaller corporations have a greater risk of defaulting on their bonds, but if the business goes bankrupt bond-holders are preferential creditors and will get compensated first.
2. Trading Bonds
Traditionally, bonds were the exclusive trading realm of huge corporations and banks. Not any more – even a savvy investor can begin trading bonds with as little as $5,000. Bonds bought and sold after the initial issues are quoted in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.
3. Stocks Or Bonds?
Given what you have read so far, you might think that stocks are better for the short term and bonds for the long term, but the statistics do not lie. Bonds offer greater security and return on your investment than stocks, overall. The situation changes, however, when time spans of longer than 10 years are considered. The stock market has consistently outperformed bond investments by a large factor. This is because companies continue to increase in value and any short term fluctuations in the stock market become smoothed out. Overall, you should never put all your eggs in one basket – consider a bond as part of your portfolio to help cushion against market fluctuations. A mixture of investments is always the best choice.
Thanks to John Morris for contributing this article to our Bonds blog:
For more great stocks related articles and resources check out http://stockhaven.info
Should Investors Consider Investing in Bonds?
March 14, 2009 by How Savings Bonds Work
Filed under About Bonds
When it comes to investing in bonds, you’ll be hard pressed to spot anyone who will convince active investors that there is a place for treasury bonds in their portfolio. There are positive benefits to bond investments that will assist in making skilled investors even more effective. At the end of the day, its all about capital preservation.
Bonds may not provide the kinds of returns that successful investing can, that said, a smart trader will always have a portion of their investment portfolio in short term bonds. There are a couple of perfect reasons for this:
Don’t Spend It All In One Place
A skilled trader doesn’t use all of their trading capital when investing. This adds too much risk to their portfolio. By having a portion of your portfolio invested in bonds, you are ensuring that your portfolio has money for when things don’t work out as planned.
The Benefits Of Short Term Bonds
The advantage of short term bonds is that if structured properly, you will without fail have a bit of extra cash at your disposal to take advantage of those unique times when going all out makes good sense.
Putting It Away For A Rainy Day
A skilled trader will always make sure that they are taking money off the table, and putting the money away. The mistake that many traders make is to increase the size of their position after each successful trade. Just because your investment went up $5000 doesnt mean you should increase your next position size by that same amount of money. This simply adds risk to your trading plan. Put the money away. You never know when a bear market will strike, setting up an excellent opportunity to buy or go short.
You’re Not Getting Any Younger
There is also a case to be made that as we get older, it makes sense for us to put some money away into something that is less risky. Bonds make a great place to sock your money away for retirement. A good rule of thumb to use is to subtract your age from 100. If you’re 25, then sock 25% of your money into bonds and 75% into stocks. This will ensure that you’re putting money away for when you need it (and that it will still be there).
Investing in bonds is very simple to do. Whether you decide to go for U.S. Savings Bonds, Treasury Bonds, Corporate Bonds, Municipal Bonds, they all work in the same fashion. As you can see, there is a wide variety to choose from. You can buy bonds electronically on the OTC market and find many large corporations who offer bonds. You’ll find that your online brokerage can offer bonds for sale over different periods of time.
Take the time to get to know more about bonds. They can play a role for every investor and trader’s portfolio. Remember, you can even trade bonds to increase your return.
Thanks to Christopher Smith for contributing this article to our Bonds blog:
Bonds may not provide the kinds of returns that successful investing can, that said, a smart trader will always have a portion of their investment portfolio in short term bonds. There are a couple of perfect reasons for this:
Don’t Spend It All In One Place
A skilled trader doesn’t use all of their trading capital when investing. This adds too much risk to their portfolio. By having a portion of your portfolio invested in bonds, you are ensuring that your portfolio has money for when things don’t work out as planned.
The Benefits Of Short Term Bonds
The advantage of short term bonds is that if structured properly, you will without fail have a bit of extra cash at your disposal to take advantage of those unique times when going all out makes good sense.
Putting It Away For A Rainy Day
A skilled trader will always make sure that they are taking money off the table, and putting the money away. The mistake that many traders make is to increase the size of their position after each successful trade. Just because your investment went up $5000 doesnt mean you should increase your next position size by that same amount of money. This simply adds risk to your trading plan. Put the money away. You never know when a bear market will strike, setting up an excellent opportunity to buy or go short.
You’re Not Getting Any Younger
There is also a case to be made that as we get older, it makes sense for us to put some money away into something that is less risky. Bonds make a great place to sock your money away for retirement. A good rule of thumb to use is to subtract your age from 100. If you’re 25, then sock 25% of your money into bonds and 75% into stocks. This will ensure that you’re putting money away for when you need it (and that it will still be there).
Investing in bonds is very simple to do. Whether you decide to go for U.S. Savings Bonds, Treasury Bonds, Corporate Bonds, Municipal Bonds, they all work in the same fashion. As you can see, there is a wide variety to choose from. You can buy bonds electronically on the OTC market and find many large corporations who offer bonds. You’ll find that your online brokerage can offer bonds for sale over different periods of time.
Take the time to get to know more about bonds. They can play a role for every investor and trader’s portfolio. Remember, you can even trade bonds to increase your return.
Thanks to Christopher Smith for contributing this article to our Bonds blog:
Its a good idea to get to know more about bonds so you know the difference between a zero coupon bond and US Savings Bonds. Visit us for a more in depth answer the question of “how do I invest in bonds“.
