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Investing in Bonds

A guide to determining if investing in bonds is right for you.

With the volatility of the stock market such a popular topic of investing news, you may be among many investors looking to invest in bonds. Investing in bonds is a bit different than investing in stocks and options, so let's cover some bond investment basics. This will help you feel more confident when investing money in fixed income funds and get you on your way to more successful online investing.

What exactly are Bonds?

When you want to buy a house, most people cannot pay the full amount in cash. Many apply for a mortgage from a bank. The bank evaluates the situation, decides whether or not to approve the application, and sets the interest rate to charge the borrower.

What if you are a large corporation in need of money instead of a potential homeowner? Who do you ask when you need to borrow large sums of money for a new manufacturing plant or other large project? Banks alone cannot meet the high borrowing needs of corporations and municipalities, so the public becomes the large entity's banker - through bonds.

Most of us have heard of IPO investing. This is when a company decides to sell part of itself to the public in return for capital. Bonds are another vehicle that corporations and other entities use to obtain the funds they need; they sell bonds to the public. The difference is the public investor does not receive ownership when making the investment, but becomes a creditor (the bank) to the issuer (the company) instead.

A potential investor has many choices in their bond investment strategy. Investing in municipal bonds (commonly known as government bonds) or treasury inflation-protected securities are just a few of those choices.

Why invest in bonds?

Continuing with our earlier analogy, when you assume the position of the bank and lend money, the borrower aims to pay back the loan, with interest. The purpose is to compensate you for tying up your money in the form of a loan and taking the risk of it not being paid back.

Because bonds may be less volatile than stocks, investors seeking lower risk investments find them attractive. Some make bonds part of their retirement investment strategy because many bonds are suitable for long-term investing.

The name "Fixed Income" stems from the usually fixed interest payments investors receive while invested in bonds. This is usually in the form of periodic interest payments. Retirees may choose bonds for this reason. They use their investment capital to generate the interest payments they need to pay their bills.

Not only may bonds generate a predictable income stream, but that income may be tax-free to the investor. This can be especially attractive to individuals with a high tax burden. This depends on many factors, including the type of bond, the issuer, and the investor's state of residence. Check with your tax advisor to discuss your personal financial needs and goals.

Your bond investing education would not be complete without mentioning the two main risks when investing in fixed income securities. The first is the chance that your initial investment will not be repaid. This could happen if the issuer falls on hard times or other reasons. The second main risk is the periodic interest payments you receive may become interrupted or stop altogether. This may also be the result of the issuer's financial hardship, but could be because of features specific to the bond, or other reasons.

Finding the right bond with TradeKing's investing tools

TradeKing's Fixed Income Center and Bond Finder puts you in touch with over 200 dealers offering over 30,000 fixed income securities. Just by answering a few simple questions, the Bond Finder will automatically locate products to match your needs. These could include tax status, product type, time horizon, credit rating and more. Although our Bond Finder is designed to help you discover suitable fixed income investments, the decision to invest rests solely with you and your personal finance advisor.

Try TradeKing

An online brokerage firm, TradeKing looks to help its clients engage in smart investing, whether it's with stock, options or bonds. At TradeKing we offer the same fair and simple price to all our clients - just $4.95 per trade, plus 65 cents per option contract. You'll trade at that price, no matter how often you trade, or how big or small your account may be. That's fair and simple.

SmartMoney Magazine named TradeKing the best discount online broker in 2006 and 2007 and awarded us #1 for customer service from 2008 to 2010. The SmartMoney survey compares brokerages based on criteria including customer service, trading tools, commissions, interest rates, research, investment products, mutual funds and banking amenities.

Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

TradeKing's Fixed Income platform is provided by Knight BondPoint, Inc. All bids (offers) submitted on the Knight BondPoint platform are limit orders and if executed will only be executed against offers (bids) on the Knight BondPoint platform. Knight BondPoint does not route orders to any other venue for the purpose of order handling and execution. The information is obtained from sources believed to be reliable; however, its accuracy or completeness is not guaranteed. Information and products are provided on a best-efforts agency basis only. Please read the full Fixed Income Terms and Conditions.

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