Stocks And Bonds:

Understanding The Fundamentals

Investing is a tricky thing. You need to know the terminology or you can quickly get into trouble.

One thing you'll need to know is the difference between stocks and bonds.

Stocks

Stocks are a part of the business that you are investing in. You actually own that small share of the company.

Bonds

In bonds, you are loaning the company money. Bond holders receive a flat rate of return on their investment, where stock holders fluctuate. The return is called a coupon rate. They also have a maturity date at which time they are due to be paid back. They can be issued for any amount of time up to 30 years.

Bonds, while generally considered the safer alternative, can be risky because there is alway the risk of not being paid back. This is factored into the company's credit rating. Companies that are less credit worthy will have a higher coupon rate of return, though.

US government bonds are the safest type. Blue chip corporations are also quite safe. Smaller corporations have a greater risk of defaulting, but bond holders are preferential creditors should things go bad.

Bonds can be purchased or sold on the open market. The value that they have will fluctuate depending on the interest rates that are offered for the general economy at that moment.

Corporate bonds are also listed on the stock exchanges as well. They can be purchased through your stock broker. They are often purchased in $5000 increments in their initial issue and then in $100 increments.

Which Is For Me?

Stocks and bonds -- which is the right choice? It is important to weigh the risks against the potential profit. Stocks are much more likely to increase and make a larger profit, whereas bonds are a generally safer tool.

In the short term, bonds usually offer greater security and return. For periods longer than 10 years, the stock market is a better option because short term fluctuations will even out over long time periods.

Bonds will remain a part of many people's investment strategies and rightly so. They are a stable investment that can help those who are not interested in the daily turmoil of the stock market.