Before Buying Stocks and Bonds
Given the state of the economy over the last few years, it’s no wonder everyone’s safeguarding his or her money a little more carefully. From bailouts to budget cuts, the ebbs and flows of the world’s economy are evident but Buying Stocks and Bonds often allow you to get the most bang for your buck.
Sure, you can go the traditional “save your money in a shoe box under the bed” or “let it sit idle in a bank account forgotten for years” route, but investing your money in stocks and bonds might be a better option. Allowing people the opportunity to, at times, get a hefty return on investment, stocks and bonds are a way to make your money work a little harder for you. However, before you run out and buy up every investment you can get your hands on, there are a few things to consider to ensure you are making the right decision.
Before Buying Stocks and Bonds Assess Your Financial Situation
This means looking at everything from your current financial situation, to where you want to be in five, 10, or 20 years. It’s important to do this, because it keeps you honest with yourself and forces you to decide just how much risk you are willing to take when it comes to your hard-earned money.
Stocks and bonds have higher risks, but can pay off with better returns if everything goes favorably. The U.S. Securities and Exchange Commission offers a great savings and investing guide on their website, giving people a good idea of how to get started.
Nest Eggs Aren’t Just a Good Idea, They’re a Necessity
When making the decision to dive into the world of investing, it’s important to ensure you have a backup of reliable funds and savings just in case things don’t go as planned. While not all investments are expensive and risky, they can be unpredictable and could possibly cost you lots of money. However, if you have a hefty savings on which you can depend in case the unexpected happens, you will have less to worry about and can take advantage of investment ventures that come your way.
Know the Difference Between a Stock and a Bond
Although both are investments, stocks and bonds are entirely different. It’s important to recognize and understand these differences, as they are not interchangeable when it comes to investing. Certain people are better suited for one or the other, but ideally a portfolio would be made up of a complementary combination of both.
According to Wikipedia: Stocks aka. Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.
Being a fractional ownership of the company stocks can appreciate in value if the company grows rapidly or the perception of its value changes due to market perception. Ownership also entitles the holder to a share of the profits of the corporation which may be paid as dividends or reinvested into the company to enable further growth.
Bonds on the other hand are debt instruments. Wikipedia defines bonds this way: a bond is a negotiable certificate that acknowledges the indebtedness of the bond issuer to the holder. It is negotiable because the ownership of the certificate can be transferred in the secondary market. It is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals (semi annual, annual, sometimes monthly).
It’s important to know that stocks can grow rapidly over time, faster than bonds, but at the same time they can do just the opposite and become worthless. Bonds are more stable and reliable and will always be worth their face value at maturity (unless the issuer declares bankruptcy), but can will vary in value when sold on the secondary market prior to maturity. Bond values fluctuate based on the prevailing interest rate in the market. See What are Company Bonds? for more information.
What is a Mutual Fund?
Wikipedia defines A mutual fund as a type of professionally-managed collective investment scheme that pools money from many investors to purchase securities [ i.e. stocks]. A small investor can diversify his holdings of stocks by buying a single mutual fund rather than holding many individual stocks. See: Investing in a Mutual Fund
For more information See:
Five Mistakes the Average Investor Makes
About the Author:
Eliza Morgan is a full time freelance writer and blogger.
