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Investing In Bonds- How Is It Done And Is It Safe?

By Guest

Stocks and bonds. Doubtlessly, you’ve heard of them, and if you have been reading my articles, you know what they are. If you haven’t, here is a quick update: stocks represent a fraction of ownership in a company, and a bond represents money that a company “borrowed” and has to pay back on set dates. You may have heard that bonds are “safer” to invest in than stocks, but is this true? How are bonds traded, and what are the differences between a stock market and a bond market? Hopefully, this article can put these questions to rest.

Unlike the stock market, bonds markets do not typically have a centralized trading system. Instead, bonds will be traded in decentralized, dealer based over the counter markets. When an investor buys or sells a bond, the counter party to the trade is almost always a bank acting as a dealer. Another difference between bond markets and stock markets is that sometimes investors do not pay broker’s fees to dealers with whom they purchase or sell bonds. Instead, the dealers get their money by collecting the spread. The spread is the difference between the price at which the dealer purchases a bond from one investor and the price at which he sells the same bond to another investor.

In terms of volatility, bonds are generally somewhat safer than stocks, particularly short and medium dated bonds, however the value of stocks can definitely vary. Bonds are liquid – it is pretty easy to sell a bond investment, and the safety of a fixed interest payment twice a year is attractive. Bondholders also enjoy certain legal protections: in the United States if a company goes bankrupt, its bondholders will be paid before stockholders because they are creditors.

On the other hand, bonds also come with their risks. Fixed rate bonds are subject to interest rate risk, which means that their market prices will shrink in value when the interest rates rise. Bonds also can be subject to other risk factors such as call and prepayment risk, reinvestment risk, event risk, liquidity risk, credit risk, inflation risk, yield curve risk, volatility risk and sovereign risk. A bond that undergoes a price change can additionally affect mutual funds that hold these bonds immediately. If the value of the bonds in a trading portfolio has plummeted over the day, the value of the portfolio will also have fallen.

Finally, even though the money will go to them first before shareholders, in the case of bankruptcy there is a hierarchy of creditors that must be paid that bondholders are not on top of, so there is no guarantee of how much money will go to repay the bondholders. Bondholders have been known to lose some or all of their money when this happens.

Mallory Megan works for Rapid Recovery Solution and writes articles on commercial collection agencies.

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Article Citation
MLA Style Citation:
Guest, Guest "Investing In Bonds- How Is It Done And Is It Safe?." Investing In Bonds- How Is It Done And Is It Safe?. 6 Jul. 2010. 10 Oct 2014 <>.

APA Style Citation:
Guest, G (2010, July 6). Investing In Bonds- How Is It Done And Is It Safe?. Retrieved October 10, 2014, from

Chicago Style Citation:
Guest, Guest "Investing In Bonds- How Is It Done And Is It Safe?"

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