Buying And Selling Corporate Bonds: How Does It Work?

how does a corporate bond work

Buying Corporate Bonds can be a good investment strategy for those with the financial backing to engage in it, but for most it is a bit too risky and many individual investors prefer to opt for lower-risk investments. Corporate bonds are similar to government and mutual bonds, but come with greater risk. The risk can be worth it to some, however, because there is potential for higher income when compared to government and mutual bonds. These bonds are used to help corporations expand. The corporations issue the bonds that are basically IOUs, which means they are "debt." The bonds, also called "corporates," are then sold, usually in amounts of $1000 or $5000, for example, and the money acquired from the bond sales is used by the business to expand, applying the funds where needed. There are different maturity periods too, so there are options depending on the length of time you want to invest for and what fits into your budget or life.

Corporate bonds are not stocks. In fact, it is similar to a loan system. If you want to finance a new car, you need to apply for the loan, which is money the bank pays to the auto dealership after you are approved. You then have given the bank the IOU, they have shelled out the cash, and you pay them back. In the matter of Corporate Bonds, the Corporation gives the IOU to the investors, the investors provide the cash, and the corporation then owes the investors as if they were "loaned" the money. This is where the higher risk comes in. If for some reason the company goes under, you are not guaranteed the money you would have earned through the bond purchase and interest. However, assuming everything goes well, upon the purchase of the bond the corporation provides a maturity date, which is the day they believe they will pay you back.

Corporate Bonds are purchased, or invested in, through a bank or financial advisor. If currently working with a financial advisor, it would be best to ask about possible corporates that seem promising and the advisor can compile the information and explain the risks and costs. If you're new to

investing, you have some choices. You can go through a financial institution that specializes in investments, or simply ask your bank. It can be beneficial to have questions ready if you're new to investing, also.

You will want to know the financial advisor's background and experience, as well as how they are paid and if they will be the only person managing your account. Some people have found themselves in bad relationships with financial advisors being paid while they make little on their investments. It can also be beneficial to know what sorts of fees or costs will be associated with using that financial institution, and you may want to check into several before deciding on one. Recommendations can also be helpful so ask friends or colleagues who they do their investing with.

As far as selling corporate bonds, this is also done through the financial advisor assuming you have hired one, or are working with your bank. Another option for the brave or experienced investor would be online trading companies. It should be noted that if you sell a corporate bond before its maturity date and payout, you risk losing money. If you're thinking of investing in corporate bonds, but worry about the length of the maturation period, it might be best to consider short-term bonds that mature in one to five years.

Overall, the best course of action is to consult with your bank, or specifically financial advisor. This can usually be in the form of a proper meeting where financial assets are discussed and the advisor will present the options that are available based on the amount of money you are have available. The advisor can explain what the risks are with each, and help in understanding how some investments that seem similar can have different risk factors. Once thought and discussion have been put into the equation, decisions can be made and the investments can be done through the financial advisor, who will also be monitoring your investments.

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