Bond Investing for New Investors
When bond investing, it is important to understand the terminology involved to avoid investing errors. Bonds have lifetimes, referred to as the maturity of a bond. The maturity of a bond depends on the type of bond which can be anywhere from one month to fifty years. If the bond is callable, it means that the entity that issued the bond has the right to call the bond back in at any time they choose. This means they can buy the bond back before it matures. When bond investing you should also understand the term put provision. This provision allows the buyer to sell the bond back at face value before it matures. There are rules as to when this can be done however, and it is not a common provision. When trading and investing it is also important to understand the term convertible bond. This means that the bond can be converted into stock in the company that issued it. The price and the time-frame for conversion must be specified at the time the bond is issued. If you decide to purchase a convertible bond, when bond investing, you must be sure to understand the basics concepts of investing in stock. You should also know what secured and unsecured bonds are as well when bond investing. Secured bonds are backed by collateral by the company that issued the bond which then covers the value of the bond. Unsecured bonds are exactly the opposite and are not backed by collateral. They are also known as debentures and they are backed only by the creditworthiness of the entity issuing them.
There are several ways to conduct successful money management and participate in bond investing. You can buy bond funds, individual bonds, invest in money market funds, or you can purchase unit investment trusts. Bond funds are like stock funds, in that they offer professional selection and management of a portfolio of securities. A bond fund is actively managed and can be added to or eliminated from an investor’s strong portfolio in response to investor demand and market conditions. They also do not have a maturity date. Mutual fund investing is great for investors interested in long term investing. When bond investing, bond funds allow an investor to diversify risks across a broad range of issues leading to better investing. Individual bonds are bought and sold in the over-the-counter (OTC) market and some are also listed on the NYSE (corporate bonds). The OTC market includes hundreds of securities that are traded electronically and by phone by firms and banks. Money market funds are a pool of investments in highly liquid, short-term securities. These funds typically consist of securities having maturities of three months or less and may include municipal bonds, a COD, and U.S. Treasuries. When bond investing, it is important to note that money market funds are not insured by the U.S. government. Bond unit investment trusts offer a fixed portfolio of investments in municipal, mortgage, corporate bonds, or government bonds. This trust is not actively managed and typically ends when the last investment matures.
There is a lot of additional information that you should know about bond investing in order to conduct successful portfolio management and portfolio diversification. Be sure to do your homework before you begin investing in order to avoid making investing mistakes!