Most investors are surprised to learn the market for bonds is far larger than the market for equities like stocks. Companies looking for liquidity, leverage or the flexibility to make short-term purchases are often required to take out short-term loans. Fast-growing companies use bond offerings to fuel their expansion plans.
These realities of the market create opportunities for investors. Taking advantage of bond investments is something many investors should consider.
Bonds do not respond to the same kinds of market forces as equities do. Rapid changes in price and value are rare. Because they often retain their value for long periods of time, bonds can be a hedge against markets that might otherwise be very costly for growth-oriented portfolios.
In fact, bonds can increase in value if markets turn sour for equities. Bonds benefit from many of the same dynamics as other hedges like precious metals or real estate. If the equity markets do not produce adequate returns, investors are likely to move their principal into safer vehicles like bonds in order to ride out the valleys. All that ultimately matters is total return, and if the income produced by a bond exceeds the growth of a stock, the choice is clear.
Investments that regularly provide income are among the most popular. This is one among many reasons dividend-paying stocks are sought out by investors. In many cases, those dividends can turn what would otherwise be a loss into a small gain, especially if a particular equity issue is being dragged down by the market in a situation where it might otherwise do well.
Long-term bond income can be crucial to the success of a portfolio and can make a bond investment far more valuable than it might otherwise be, especially if the bond is paying above market rates.
Municipalities use bonds in much the same way corporations do. The difference is when an investor loans money to the government, the interest paid on that investment can often be collected tax-free. This is one of the reasons municipal bonds are so popular, especially with retirement-minded investors who are less interested in growth and more interested in tax-free income.
Many investors start out in the bond market by investing in a mixed-vehicle or tax-advantaged mutual fund. From there, it isn’t a big step to buying bond issues directly and taking full advantage of their benefits.