Everything young investors need to know about bonds, why they're used, and how they fit into your investing strategy.
What Are Bonds in Investing?
Think of bonds like an I.O.U. — you’re the lender, and the issuer is the borrower.
Less risky than stocks
A source of regular income through interest payments
1. Government BondsIssued by national governments. Examples:
UK Gilts
Considered very low risk — especially in developed countries — because they’re backed by the government.
3. Municipal BondsIssued by local governments or cities. Often come with tax advantages.
Why Bonds Matter in Your Investing Portfolio
Steady income: Regular interest payments
Diversification: Bonds often move differently than stocks, reducing overall investing portfolio risk
Many professionals compare their potential returns to a "risk-free" bond yield.
For example, if government bonds are yielding 6%, why would you invest in something riskier unless you expect to earn more? This is called a risk premium — the extra return you expect for taking more risk.
1. Through a BrokerMost online investing brokers offer access to government and corporate bonds.
3. Bond ETFs or Mutual FundsIf you want diversification without buying individual bonds, bond funds are a great starting point.
5. Popular Online PlatformsWell-known platforms like Fidelity, Vanguard, and Interactive Brokers all offer access to bond markets.
Example Tickers of Popular Bond ETFs
BND — Vanguard Total Bond Market ETF (broad exposure to U.S. bonds)
LQD — iShares Investment Grade Corporate Bond ETF
AGG — iShares Core U.S. Aggregate Bond ETF
These ETFs are accessible, diversified, and trade like stocks.
Important Things to Consider When Investing in Bonds
1. Credit Risk: Can the issuer pay you back? Government bonds are safer. Corporate bonds vary in risk.
2. Interest Rate Risk: When interest rates rise, existing bond prices fall. The longer the maturity, the more sensitive the bond is to rate changes.
3. Tax Implications: Some government bonds are tax-free at the local or national level. Corporate bond income is usually taxable.
4. Currency Risk: If you invest in international bonds, currency fluctuations can affect your returns.
Chasing high yields without understanding the risk
Not considering how bonds fit into your overall investing strategy
How Bonds Fit into a Beginner Investing Strategy
Protect capital
Balance riskier investments like stocks
Quote to Remember
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This article was written by Itai Levitan at www.forexlive.com. Read More Details
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