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A bond is an IOU issued by the government, any governmental agency, or corporation to cover the loan that has been drawn by the bondholder. Until the bond matures, i.e. after around ten years, the bond- holder has to keep paying the interest on a periodical basis. Bonds are not that grippingly exciting as stocks are, nor is the whole procedure so fast and risk-ridden. However, the bonds determine the growth of the economy and even keep your investment portfolio balanced. Therefore, it is necessary that you understand stocks and bonds and include bond investments in your portfolio. There are two sides of the same investing coin. One face shines as the bonds mature, and the other is turned towards stocks. Understanding stocks and bonds is very important, and neither of the two should be neglected. Stocks help to earn easily, and quite fast too. But it is the bonds that will somehow keep your financial statements and conditions still afloat when the economy sinks. If you are in the possession of stocks, you become the part owner of the company, but if you own the bonds, you become the creditor of that company. You might frown to see that it is advisable to bind your hands with bonds as well, since their rate of return is much lower than that of stocks. However, this news might cheer you up considerably to erase the frown from your face- the bonds have low risk factors that are at work, so it guarantees you a lot of security, even when the wild wide swing of the stocks from high to low finally gives way to a complete crash. Thus, bonds act for you as the backup financial plan and you will be still on the safe side. Stocks and bonds- just like Frick and Frack, Abbot and Costello- are always thought of together. They have core similarities. Both stocks and bonds are sold by corporations and traded in the open market. Bond rates also fluctuate a little and are a tad influenced by the changes in the market conditions. These are the only two similarities that you will find in between the two that makes the perfect pair. However, when it comes to risk and rewards, both are widely dissimilar. When you purchase stocks, you make yourself the part owner of that company or corporation that has its stocks being sold in the market. You therefore share both the profits accrued and the losses incurred by the company. Therefore, some stocks are safe and profitable while others may simply go haywire when failure is met. But you will hardly be able to predict the situation ahead on your own. When you purchase and own corporate bonds, you are actually giving a loan to company that needs it. You are now the creditor of that company. You will be paid back a fixed rate of interest and for a fixed period of time. But if the company rolls over with its belly up when the market crashes, you still need not worry, for the risk of not being paid back at all is highly low. With stocks, the rates of return are pretty high, and profits could be sky-high. But in the case of
bonds, the returns are usually meager. The differences in between the stocks and bonds are very necessary. Because of their differences, they complement each other. An investor, to maintain a well-balanced portfolio must involve a mix of both to remain on the safe side and yet be able to make money. It is important to understand stocks and bonds and then make the right decisions.
Article Source: http://EzineArticles.com/?expert=Gilbert_Stockton
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