Bonds / Stock Market VS. Investing in the Money Market

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The bonds market does not usually come to mind when people mention "stock market." That is probably because investing in bonds is much like putting your money in the money market. You get a fixed rate of interest annually until such time as your bonds or money market contract matures and you get your full investment back.

A bond is different from investing your money in the money market. The interest rate you are getting from your money market is directly proportional to the amount of money you place in it. For instance you will only get a certain interest % annually for a money market deposit of $500,000 USD. For less than that capital investment, the interest you earn will grow proportionately smaller.

 

On the other hand, the interest you earn from bonds is fixed whether you decide to buy $1,000 USD or $100,000 USD worth of bonds. This is definitely an advantage for people with less to invest. On the opposite end, bonds take longer than money market investments to mature. Your money will be held up for that amount of time which can stretch to a period of many years. Money markets, on the other hand can be renewed every year. And if you do not withdraw the profit you received, that becomes part of the investment. In this way, the interest you earn will increase yearly.

The differences between bond investments and shares are even more numerous. First of all, the bond that you buy represents money that you loaned to the institution issuing the bond. Many large government and privately run institutions and businesses need the funding of the private sector to make their ends meet. In order to facilitate this, they issue bonds in stock markets. The person buying bonds is a creditor of the company issuing it. On the other hand, a person buying stocks becomes part owner of the corporation from whom the shares of stock came. Bonds do not entitle the owner to a share in the profits of the company while shares give their owner the right to receive profit payouts in the form of dividends and/or additional shares. The owner of the bond will always get the same amount of interest throughout the period of effectivity of the bond. Finally, bond holders will be given priority in case the company who issued the bonds files for bankruptcy. Since share holders are part owners of the corporation, they can expect to wait until the last to get any refunds that may be due or available for them.

Bonds are therefore more stable commodities to invest in than shares of stock. The trade-off is that bonds will usually give a lower interest/return to the buyer. At the end of the period stipulated, the owner of the bond gets his capital back. It is probably recommendable not to put all you have in bonds or for that matter in stocks. It is wise to have a variety of investments so that in case one fails you might still have another one to fall back on.



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