Bonds are simply signed agreements acknowledging a debt. Bonds are issued by governments and companies to raise capital. People who buy bonds are paid a certain amount of interest plus their capital investment at a specific date in the future. Bonds are attractive investments because they are low-risk and investors usually know how much money they will make from the onset.
Types of bonds
To be able to invest in bonds successfully, you need to understand the different types of bonds available. Bonds are classified according to the institution that issues them. Governments and companies can issue bonds. Government-issued bonds are known as government bonds while those issued by companies are known as corporate bonds.
Government bonds are less risky since the likely hood of a government failing to repay bond investors is very low. Government bonds can either be short-dated or long-dated. Short-dated government bonds tend to have the lowest returns since most people aren’t willing to wait for decades to enjoy investment returns.
Corporate bonds are riskier than government bonds since the chances of a company defaulting on its debt obligations are higher. Nevertheless, corporate bonds attract better returns than government bonds. The chances of shareholders being paid in the event of a default are also higher.
Bond investment risk grading
Before you invest in a bond, it is important for you to assess the riskiness of your investment. Luckily, bonds are graded depending on their credit risks, so it is easy to know if a bond’s credit risk is within your risk appetite. Investment grade bonds are rated from AAA to BB. These types of bonds have a favourable credit risk. Such bonds are issued by governments and big, blue-chip companies. It is important for you to understand the bond credit rating system in-depth for you to be able to choose bonds with a favourable credit risk.
Like any other traded securities, the prices of bonds fluctuate. To be able to invest in bonds successfully you should focus on the yield which is simply the money you will make as interest. The yield and bond price are inversely correlated in that the yield goes up when the price goes down, and vice versa. Understanding this correlation will help you choose the most profitable bonds.
Investing in bonds
There are several options to consider when investing in bonds in the UK. One, you can buy bonds through a broker who is a member of the London Stock Exchange. You can also buy directly from the company issuing the bond. It is safer to go through a broker who is a member of the London Stock Exchange. The London Stock Exchange has a platform that allows retail investors to buy and sell government bonds and corporate bonds. The exchange has safeguards in place that protect investors and their investment.
Besides using brokers, you can invest in bonds in the UK via a dedicated bond fund. This option is ideal for first-time bond investors since you get access to a fund manager who will invest in bonds on your behalf while advising you accordingly. It is important to consult a bond manager when investing in bonds for the first time since bond investing can be confusing initially, and timing is a crucial factor when investing in bonds. Your ability to make money is highly dependent on when you buy/sell your bond. Furthermore, bond managers have in-depth knowledge about the bond market.
Seasoned bond investors can consider more sophisticated bond investing options such as investing in fixed income EFTs (Exchange Traded Funds) which track indices composed of different types of bonds.
Bond investing is low-risk and very profitable in the long term. You should, however, grasp the basics first and seek the services of a bond manager to get the best out of the market without exposing yourself to unnecessary risks. The above guide covers the basics to investing in bonds in the UK. It is advisable to utilise this guide as a tool for conducting further research.