| The main difference between a stock and a bond | | | | greater risk of defaulting on their bonds, but |
| is that stock gives you part ownership in a | | | | bond-holders are preferential creditors and will get |
| company whereas bonds are loans made by an | | | | compensated before stock holders in the event |
| investor. Rather than benefiting from company | | | | that the business goes bankrupt. |
| profits the way that stock holders do, bond | | | | 3. Selling Your Bond |
| holders receive a fixed rate of return – a | | | | Bonds can be bought and sold on the open |
| percentage of the bond's original offering price. | | | | market. Their value fluctuates according to the |
| The return is called the 'coupon rate'. Bonds have | | | | level of interest rates in the general economy. For |
| a maturity date at which time the principal | | | | example, if you hold a $1000 bond that pays 5% |
| amount is returned. This makes bonds a more | | | | per year in interest you can sell the bond at |
| reliable investment, but they provide less potential | | | | higher than face value as long as interest rates |
| reward. | | | | are below 5%. If they rise above 5%, your bond |
| 1. Risk vs Reward | | | | can still be sold but usually at less than face value. |
| Although bonds typically have less risk than their | | | | This is because investors are able to get a higher |
| stock counterparts, that doesn't mean they can't | | | | interest rate than what your bond pays so in |
| flop – bonds can still end up giving you no | | | | order to offset the difference your bond has to |
| money at all. Companies with higher credit | | | | be sold at a lower cost. |
| worthiness are more likely to be safe | | | | 4. OTC Markets |
| investments but their coupon rate will be lower | | | | The vast majority of bonds can be traded over |
| than companies with lower credit ratings. Credit | | | | the counter through banks. Some corporate |
| ratings are provided by firms such as Standard | | | | bonds are also listed on stock exchanges and |
| and Poor and Moody's Investor Service. Credit | | | | may be bought through stock brokers. New |
| ratings range from a high AAA to a low D. | | | | issues of bonds are usually sold in $5000 |
| 2. Governmnet Bonds | | | | increments while bonds bought and sold after the |
| US government bonds are considered to be the | | | | initial issues are quoted in increments of $100. A |
| safest type of bonds. Blue chip corporations | | | | bond that is listed at 96 is selling for $96 per $100 |
| (those with established performance records that | | | | face value. For this reason, unless you are ready |
| span over many decades) are also very safe | | | | to make a big investment, you should probably |
| bond investments. Smaller corporations have a | | | | stick to stocks. |