Bonds are essentially IOUs. When you buy a bond, you become a lender to whatever entity issued the bond. Typically, the borrower pays you a certain amount of interest periodically. When the bond matures, it also pays you back your initial investment, or the principal value of the bond.
Bonds have some main characteristics that distinguish them from stocks:
The main categories of bonds are:
While considered a safer option than stocks, bonds do have plenty of risks, including:
Instead of buying individual bonds, many people choose to invest in bond mutual funds. In a bond fund, the money of many investors is pooled together, and a professional manager invests it in a diversified array of individual bonds (often of the same type, e.g., municipal bonds, corporate bonds, etc.).
The benefits of investing through a fund can include:
Unlike an individual bond, a bond fund’s periodic interest payments can vary over time, depending on the performance of each bond within the fund. And unlike individual bonds, bond funds never mature. Instead, investors decide when to take their money out or reinvest it.
Bonds are like IOUs, usually issued by a government or company to interested investors. Bonds tend to be safer investments than stocks. Bondholders typically receive periodic interest payments and get their principal investments back when a bond matures.