Bond yields are higher than they’ve been in recent years, and prices have fallen considerably. These government-backed bonds are issued by the U.S. Treasury are relatively risk-free. Why isn’t anyone talking about bonds? Bonds are a mystery compared to stocks.
Investors frequently talk about stocks, and most investors have portfolios full of them. Ask about bonds and you’re bound to get a different answer. Many investors think they understand how bonds work without actually knowing how they do.
Stocks Vs. Bonds: How Do They Differ?
According to Thebalance.com, “Stocks and bonds represent two different ways for an entity to raise money to fund or expand their operations. When a company issues stock, it is selling a piece of itself in exchange for cash. When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the money.”
When you purchase stocks, you are, in essence, a part owner in that company. On the other hand, when you purchase bonds, you are purchasing company debt. Stocks are more volatile, while bonds are more stable. Owners of stocks share in both company gains and losses.
Bonds are less risky, not subject to the potentially volatile fluctuations that stocks face. The downside, though, is that they lack the long-term potential that stocks can have. Bonds are not sold via the U.S. stock exchange–instead, they are sold over the counter at most banks.
When is the Right Time to Invest in Bonds?
There’s never been a better time than now to invest in bonds. They offer a fixed interest rate. This means that even if the rate fluctuates, you will receive the rate of return offered when you purchased your bond. A bond valued at $10,000 with a 5% interest rate for example, will give you an extra $500 a year on your investment.
Bonds are an excellent way to diversify your portfolio. Arguably, the best time to purchase bonds is when the economy is doing well, like it is now. Interest rates are currently low, and if they do rise, bond holders will take a softer blow than those who own stocks.
Before you decide to make any investments, talk to a financial planner to determine if it’s the right move for you.
If you’re looking to invest in real estate instead, there’s a variety of New Jersey homes that will make excellent investment properties.
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