Investing money can take many different avenues. You can invest your money into traditional investments such as stocks and bonds, or you can lend money to a specific person for start-up costs for a business. An investment occurs when you lend money to someone who will pay you back with interest, pay you back in the businesses income, or trade the ownership you have in that company.
Bonds are one of the most common types of a investments. Bonds are issued by corporations and governments. They are issued in order to get money for growing a business or running a government. A bond is a loan.
Bonds are usually issued in $ 1,000 increments. You can buy one bond for $ 1,000. The government also issues lower denominations such as $ 50 savings bonds which you are probably most familiar with. You might even have a few savings bonds that you have received over the years as gifts.
You can earn interest from one or a combination of three basic ways. The first is through interest. You will always be paid some type of interest on a bond. IF you buy a bond of $ 1,000 at an interest rate of 4%, you will be paid $ 40 a year either annually or semiannually. Some bonds will wait the entire period and pay the principle payment and all the interest together.
You can also buy a bond at a premium or discount. A premium would be paying more than the face value and a discount would be paying less. You could buy a $ 1,000 bond for $ 900 and when you are repaid the principle you would get $ 1,000 which would be a $ 50 profit. This is another way you can earn from a bond in addition to the interest rate you choose.
The third way you can make money with a bond is by trading them. You can trade bonds just like you can trade stocks. Bonds may mature anywhere from 6 months to 30 years and in that time you can sell them to others or buy them. If you sell them for more than what you paid, you will have made a profit.
I will give you an example of how this all works. A company is selling $ 1,000 bonds for $ 900 each. You buy 10 bonds for $ 9,000 at an interest rate of 4% and they mature in 10 years. After 10 years you will have made $ 3,000 in interest and $ 1,000 when they repay you $ 10,000 for a total profit of $ 4,000.
You could have sold any amount of these bonds before maturity if anyone was willing to pay for them. Bonds are better off for those closer to retirement. Unless you are planning to invest in junk bonds and do a lot of trading, you will not make as much as you would in the stock market.
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