You are an investor and you have decided to invest in bonds. There are a couple of very important factors that you must consider when deciding which bonds to purchase and where. Buying bonds can be a hectic activity if you are unprepared. However, if you have done your homework, then it will be a piece of cake.
There are various types of bonds available in the market. Government bonds are considered one of the safest, if not the safest type of bonds for investment. In the UK, government bonds are called gilts, and in the US, they are called treasuries. Companies also issue bonds to raise capital. However, they have to offer better interest terms for their bonds to compensate for the risk levels. For the investor, this means greater risk, but greater yields, too.
Another factor to put into consideration is the amount of time that you are investing your money. Bonds come with maturity periods, which is the time during which your money will be held while interest is accumulated. Some bonds may be recalled. This means that they can be resold before maturation, and this may be beneficial for you. However, some cannot be recalled, and heavy penalties are imposed for recalling. This will be particularly noteworthy in case you will need the money released after some time.
Say you have decided to invest in corporate bonds. How can you tell the risk level of a company? This can be done through the help of rating agencies. In the UK, two agencies come to mind; Moody's and Standard & Poor's. These use a system for rating the safety of a bond, where AAA and BBB are good ratings while D indicates defaulting. However, note that these ratings are based on probabilities and are not actual guarantees.
Timing is also crucial when buying bonds. Although this may not make much difference, due to the low returns of bonds in general, a good investor will buy bonds before interest rates go down, and resell them when they do. This way, you earn a capital gain on your principle amount.
Where can you buy bonds?
Gilts can easily be bought through your stockbroker, or the Bank of England's brokerage service, at a fee. Alternatively, you could choose to buy them directly via the Post Office or the Debt Management Office. Note that income from gilts is liable to tax and must be declared in your tax returns. Capital gains, however, are tax-free.
You can also buy individual corporate bonds on the stock market. If you are a small investor, you may prefer to invest via a mutual fund, as they are better equipped with knowledge on the bond market.
Information is vital for an investor who is buying bonds. Strive to stay in the loop with the current trends online. Who knows, you may just spot an opportunity that may prove lucrative for you.