An Investor’s Guide to Bonds
Why should one choose to invest and trade in bonds?
There are many merits when it comes to trading bonds compared to equities. Bonds are not only considered to be safer investment, but also contribute to the diversification of an individual investment portfolio. Responsible investors should always avoid making risky investment decisions, no matter how reliable the decision is perceived to be. Investment diversification can reduce risk and improve a portfolio’s overall rate of return.
In order to ensure a healthy balance in an investment portfolio, holding of bonds is both suggested and required. This is because bonds generally move in the opposite direction to equities. If equities give way, bonds will in theory improve, and vice versa.
Bonds generally provide greater certainty when it comes their income stream and return of capital. The regular interest income and principal repayments at maturity provide indeed a comforting level of security.
Those who choose to invest in bonds can be confident that they will receive an annual return, while an equity investor must rely on the decision of a company’s board when it comes to the annual dividend received.
An investment in a corporate or government bond generally involves less risk than an investment in equities. In the event of difficulties or bankruptcy of the borrower, bondholders possess a priority of repayment over shareholders. Government bonds are considered the safest form of investment.
Another key difference between bond and equity investments is the level of volatility. Stocks are more sensitive to developments within the economy and the company itself, whether those developments are positive or negative. However, bonds are less volatile, as their yield is usually known.