Investing For Beginners: 3 Quintessential Bond-Buying Tips
Purchasing bonds is one of the smart choices to have in your investment portfolio. No matter how old or young you are. If you don't know much about the bond market and struggling to find the right option with a lower risk of losing money, this post will help you prepare a smart mindset before investing. Take note of the tips we'll share with you in this post.
(1) Vetting an issuer is a must - ALWAYS
Always check the bond issuer's credit before investing with them. They will look at your credit record if you are to apply for a loan. Why not do record checks too? Whenever you purchase bonds from a municipality or a company with shaky finances may result in a failure to meet interest payments. The issuer might give back your main principal when it needs to, bringing you to a process of losing a significant amount of money.
That's the time wherein credit ratings comes in. There are three major rating agencies for bond-buying in which evaluates the credibility and worth of a bond issuer. That of which are Standard & Poor (S&P), Fitch, and Moody's.
Best rating to expect with S&P or Fitch is a AAA, while in Moody's is Aaa. The lower the alphabet you get, the less creditworthy the bond issuer will be. In short, those with lower alphabet rating will likely to fail its obligations.
Remember that bonds with rates below BBB- by S&P and Fitch or the Baaa3 by Moody's are also called and referred to as junk bonds. The junk bonds aren't considered to be an investment grade. It will best if you stay away from such bonds.
(2) Minimize taxes
Among the great thing on bond-buying is its barring default. It provides a steady stream of anticipated income via paying interest two times per year. The only thing to do is to fork a percentage of interest income to the IRS (unless you invest in municipal bonds).
A municipal bond is also called the munis. These bonds are issued by a state, city, or a county, as opposed to corporations. One of the benefits of a muni bond is their interest always exempt from federal taxes. If you purchase your home state issued munis, you are to avoid state and local taxes.
Now, in corporate bonds interest rates offered are higher than the muni bonds. In which means you need to analyze if it pays to score higher amounts of interest than you need in paying taxes on a lower amount of interest (yours tax-free).
For instance, you have a 25 percent tax rate, purchasing a corporate bond pays 4 percent interest is effective as well as buying a muni bond and paying a 3 percent interest. Now, if that corporate bond offers a 3.5 percent interest only, you'll have better win with the muni bond.
(3)Always aim for better growth in your investments
In every bond purchase you do, you agreed to lend your issuer with a certain amount of money available at the time. Do you have an option to sell your bonds before it matures if you want to free up your cash? It's your choice. The thing is, if you do so, you aren't guaranteed to recover your main principal.
For instance, the value of your bonds drops since the start of your investment. You are to lose your money if you sell them at a price lower than the amount you purchase them. In conclusion, the right time to buy or sell different bonds is best to execute if the growth of your investment does move higher compared to your initial investment.
There are numbers of reasons to start investing in bonds. Remember the advice we've shared with you in this post, and with a bit of luck, your investment could grow significantly.
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