What You Need to Know About Bonds

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The sooner you start investing, the easier it will be to become wealthy. The stock market has shown this for over a century.

We’ll start with stocks and bonds in this essay. But first, let’s clear up some common investment myths.

Investing continues to confound people. People seem to think there is a magical way to make a fortune by investing in stocks and bonds. Investing mistakes that I’ve seen are:

It’s a 24-hour Wolf of Wall Street party, with traders screaming “SELL! SELL!!” into phones to make millions.

Investing is risky because everyone exclaims “financial collapse!” at the slightest market decline.

Honestly, you have every reason to believe it.

Hollywood and the (annoying) talking heads on cable news have portrayed finance as a wild beast inappropriate for the average person… yet many of us are uninformed of how an investment works.

That’s why we’re here to dispel some of the most common financial myths and misconceptions:

How do stocks and bonds differ? How can you keep your portfolio balanced? Do stocks and bonds compare?

This essay won’t tell you which stocks are hot right now or which investment strategy will make you a fortune. If you’re looking for anything similar, I recommend watching TV news pundits.

SPOILER ALERT: Cramer has underperformed the S&P 500 since 2008.

Instead, remain for a straight-talking lesson about stocks and bonds, what they are, and how they can help you invest.

How do stocks work?

You own a piece of a corporation when you own stock. Stocks are also called equity because you own a piece of the company.

Are you ready to pay off debt, save money, and build real wealth? Get our FREE Ultimate Personal Finance Guide.

Basis of stocks

If the company succeeds, so will your stock. So seek to invest in high-performing firms.

If you prefer self-service, you can use E*Trade or TD Ameritrade.

Whenever I teach someone about the basics of stocks, they always ask questions like:

“What stocks should I buy?”
“Is X company a good buy?”
“Is $XX too much for this stock?”
First, SLOW DOWN.

Before investing in any stock, take a moment to learn how to determine which stocks to buy. Understanding stocks is the first step to investing in whatever looks attractive on any given day.

Choosing the right stock

Consider organizations that you admire and utilize to narrow the universe of possible stock options.

Right now, write down 15 companies you often use.

Consider all. As in:

Etsy’s services include IBM, UPS, and Whole Foods Market.
3M, Apple, and Snap
Among the entertainment companies are Disney and Netflix.
Tesla, Ford, and CSX are all in the transportation business.
Instead of 5,000 stock options, there are now 15.

A good company does not automatically equal a good stock!

No stock is worth buying just because you think Gap’s khakis are great.

Rather, concentrate on five key areas:

Are sales growing compared to last year? Two years ago? Say five years ago.
Is product development doomed? What do you know about their next products?
Profitability/growth/EPS: A stock’s true financial roots These are intimidating. Fortunately, many websites will help you.
Insider trading: Are senior company executives growing or decreasing their stock purchases (a sign of their trust in the company)?
Is management good? How much is exchanged? What is their ethos, and how well do they execute?
You can get all of this material for free online, so do your homework. Avoid a company if you have any of the above suspicions.

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Benefits of Stock Investing

If your stock is strong, you can earn a lot. You can beat the market if your stock is superior. You may choose a stock from a known sector.
Your funds are liquid, meaning you can sell your stock at any time.

Investing disadvantages

Sadly, if a company fails, so does your stock. Lack of diversification in stock might spell doom (although you can easily reduce your risk by picking bigger, solid companies).
Unlike bonds, your investment is not guaranteed. In the market, you may lose or gain nothing.

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What are bonds?

Bonds are like bank IOUs. You provide them credit at a set rate of interest.

Bond tenets

“Hey, if you lend me $100, we’ll give you $102 back in a year,” the bank promises.

A two-year bond currently yields around 2%. (Click here for the latest updates.) Bonds are:

  • Stable to the max
  • Certainly, there will be a comeback.
  • Their gains are minimal.
  • Who would invest in bonds with these traits?

Those who want to know their monthly income should invest in bonds. It doesn’t matter if you’re twenty or seventy. Bonds are a safe investment, despite the lower returns.

After all, some people dislike the market’s volatility. That’s OK.

Bonds’ benefits

When you buy a bond, you know how much you’ll get.
You can choose the bond amount (1 year, 2 years, 5 years, etc).
Greater returns come from longer time periods.
Government bonds are particularly stable. A government bond can only lose value if the government defaults on its loans, which it does not. It merely creates more.
Bond disadvantages
Because bonds are so stable, they yield less than stocks.
With bonds, your money is locked away and unreachable for a length of time unless you want to risk losing it by withdrawing it early.
Bonds, unlike stocks, are difficult to buy and sell.

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