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