How to Invest in Bonds

Because few beginners or average investors understand bonds, this investing guide for beginners covers bond basics and how to invest in these popular investments.  In order to add balance to your investment portfolio you should invest in bonds as well as in stocks.  What are bonds vs. stocks, and how should you invest in them?

Corporations raise large amounts of money to finance their operations by selling stock issues or bond issues to investors.  Government entities like the federal government or the state of Ohio can only issue bonds … to borrow money.  When you invest in bonds you are lending money to the issuer at a FIXED interest rate for a FIXED period of time, like for 20 or 30 years.  At the end of the fixed time period a bond matures and the bond owner is paid back the amount borrowed.  End of story.  Stocks have a perpetual life and don’t mature.  As a general guide to investing: people invest in stocks for growth; and they invest in bonds to earn higher interest income than they can get elsewhere.

Many people who invest in bonds think that they are safe investments, and they are relative to stocks.  Don’t invest in bonds uninformed.  Bonds trade in the open market after they are issued, just like stocks do.  They fluctuate in price (or value) just like stocks do.  If you invest in bonds and interest rates go up significantly your bond investment will lose value.  Why?  The interest rate on a bond is FIXED and never changes.  Higher new rates make existing bonds less attractive, and investors will sell bonds in the market, forcing prices down.  Until you understand this, you don’t really know how to invest in bonds and the risk involved.

While millions of Americans feel comfortable with their knowledge of how to invest in individual stocks, relatively few average investors know how to invest in and analyze individual bond issues.  As a general investing guide for beginners: you don’t need to invest in and analyze individual bond issues.  The vast majority of people who invest in bonds invest in them indirectly by simply investing money in mutual funds called BOND FUNDS.   When you invest in a bond fund professional money managers analyze and select the bonds to include in the fund portfolio.  This makes investing in bonds quite simple for beginners and average investors.  When you invest in a bond fund you own a small piece of a very large portfolio of bonds.  This gives you diversification and professional management all in one package.

Now you simply need to learn how to invest in bond funds.  You can invest through a financial planner or other representative and pay charges, fees, and expenses to both the fund company AND for the services of the representative.  Or you can learn how to invest directly with some of the biggest and best fund companies in America and save a lot of money in the process.  My book, Invest Informed, covers the details of how to invest in bonds.

If you found this article interesting you might also want to check out the one on how to invest in stocks.