Advantages, disadvantages and what you should pay attention to
Bonds are considered a relatively safe form of investment. Compared to other investments, however, they have both advantages and disadvantages. Bonds offer regular interest payments, but lower yields than stocks. If you want to buy bonds, there are also a few things to keep in mind.
Many investors who are looking for stable returns and want to hold their capital rely on bonds. The interest-bearing securities can be issued by governments, companies or other organizations. When you buy a bond, you are lending money to this so-called issuer as an investor and you receive interest in return.
At the end of a predetermined term, you get your invested capital back. Bonds are therefore considered to be comparatively safe. The term can vary between a few months and several years and is decisive for the amount of interest.
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Buying bonds: You should pay attention to this
Typically, bonds are negatively related to stocks. In concrete terms, this means that when stock prices rise, bond yields usually fall – and vice versa. Bond prices are subject to less fluctuation. Since they are traded on the stock exchange, the prices still vary.
One disadvantage: the value of bonds depends on the level of interest rates, especially since the yields are lower than with classic securities. In comparison to call money accounts or time deposit accounts, however, the interest rates are usually higher. Another advantage: a relatively low-risk and regular source of income.
The pros and cons of bonds
As with any other investment, a loss is also possible with a bond, because the so-called credit risk applies. This means that if an issuer goes bankrupt during the term, it cannot repay you the capital you have invested. Compared to traditional stock trading, however, the risk is rather low.
In addition, bond buyers are given preference over shareholders in the event of bankruptcy. Again, if you want to buy or sell bonds, you can do so during stock exchange trading hours.
To do this, you place an order with your bank or an online broker. Scalable Capital recently entered the bond business as the first neo-broker in Germany.
Open a depot with Scalable Capital now
Liquidity plays an important role when buying. Because this determines how quickly you can convert bonds into cash. Example: A liquid bond is traded frequently by a relatively large number of investors. Interest-bearing securities that trade less frequently are considered less liquid.
Buy bonds: liquidity and prices
You can also buy or sell bonds that are listed for exchange trading on the exchange during the term. For this you have to place the order with a bank or an online broker. An important factor when buying a bond is liquidity.
Liquidity determines whether you can convert bonds into cash quickly and at a reasonable price. A liquid bond is actively traded and has a sufficient number of buyers and sellers. It is true that illiquid bonds promise higher returns. However, a resale can result in a lower price.
Important factors for liquidity: trading volume, market capitalization, market size and activity. In the meantime, you can find out about the creditworthiness of issuers from so-called rating agencies. If you want to be on the safe side, you should only invest in bonds with a particularly high credit rating.
In terms of maturity, the longer the investment, the higher the interest. And: The higher the interest rates, the longer your capital is usually tied up. Ultimately, this also increases the risk, which is nevertheless lower than with shares.
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