The world of trading has recently received some newfound interest. It would seem that more and more people are enamored by trading than ever before. This development shouldn’t come as much of a surprise. After all, the 21st century has opened up quite a lot of opportunities for your average person. To many, it might come as a shock that before the 2000s, only the few privileged could participate in trading. Stock brokers, bankers, CEOs, and other figures who enjoyed an above-average income. However, this fact is no longer true. Thanks to certain developments, anyone can now participate on the market, provided they have the means.
Popularization of Trading
So, what changed? Well, for one, discount brokerages started popping up. As the name suggests, discount brokerages offer the same services as a brokerage, except everything is at a discount price. So, by visiting these establishments, the average, middle/working class stiff can invest some of their cash and hope for a return.
Another exciting development is the rise of online trading. We are certain that many of you will be familiar with this practice, as it is how most people prefer to trade in 2022. Online brokerages allow you to place an investment on anything you could possibly imagine. From the crypto market to the stock market, to forex, and of course bonds.
What is the Bond Market?
We mentioned before that online brokerages give you access to all sorts of markets, including the bond market. In this article, we are going to be focusing entirely on the bond market, and what it means. To do so, we will share 5 interesting facts about the bond market, and bonds in general. However, first we must explain precisely what the bond market is, and how it works.
So, the bond market, alternatively called the debt or credit market, is a two-level financial market. On the first level (called the primary or first market) participants can issue new debts, and on the secondary market, they can buy or sell debt securities. The reason it is called “bonds market” is because these debts are usually sold in the form of bonds. Apart from bonds, however, you can also purchase notes, securities, and bills.
So, now that you are fully aware of what the bond market is, let us discuss the five facts that every investor should know, regarding bonds.
Fact #1: Ratings
A lot of bonds have different ratings. Agencies that focus on reviewing and rating bonds serve an important function in the market, as they evaluate whether an issuer has the means to eventually repay the bond they’ve issued. There are numerous ways to rate a bond. However, the most popular nowadays seems to be the S&P system.
The S&P System
Rating agencies are most likely to use the S&P rating system. According to this system, triple A (AAA) is the highest ranking. From AAA there are 11 other lower ratings. They are the following:
- AAA
- AA
- A
- BBB
- BB
- B
- CCC
- CC
- C
- DDD
- DD
- D
As you can see, D is the lowest rating. However, even these 12 are not a complete list. As ratings between AA and CCC can be accompanied by a “+” or “- “symbol, indicating their quality in regards to other bonds of the same rating.
Fact #2: Bonds are a safer type of investment
Many people are attracted to the bonds market due to its reputation as a safe institution. The volatility of the bonds market is notoriously low, meaning that trading in bonds is definitely safer than trading in stocks, forex, or cryptocurrency. However, don’t make the mistake of assuming that the bond market does not come with a risk.
When interest rates change, the bond prices will begin changing very aggressively. The reason is simple. Investors don’t want to keep a low-paying bond, and will attempt to get their hands on something better. The resulting tension leads to fast-changing rates and incredible losses.
Fact #3: Bonds Can Be Quite Complex
There is a prevailing myth regarding the bond market, namely that it is incredibly simple. However, while there is a degree of simplicity to the market, trading bonds can get quite complex as well. For one, the bonds that the public is exposed to, are those issued by the public corporations. However, the governments and corporations deal with larger bonds, that are much more complex.
Another reason bonds are much more complex than they appear, is because there are different varieties of bonds. There are short-term bonds, which can take anywhere between a day or month to mature properly. However, there are long-term bonds which could mature in a year or even ten or more.
Fact #4: Not All Bonds are the Same
One company can issue multiple bonds. However, not all those bonds are created equal. As we said, they could be short-term bonds, that mature rather fast, give a decent pay out, and then move on. However, they could be long-term bonds, which will take years to mature. These bonds are, obviously, a lot riskier. However, they also come with a bigger payout. So, you will need to decide which path you are willing to take when purchasing or trading bonds.
Fact #5: The Bond Market is Huge
Last, but certainly not least, it is important to realize that the bond market is huge. It will certainly shock and surprise some of you to learn that the bond market is actually a lot bigger than the stock market. Understandably, this fact might confuse some. But the truth is that the stock market isn’t even 2nd in terms of popularity. Foreign exchange trading and the bond market dominate the world of trade, and cryptocurrency is slowly encroaching on stocks as well.
Conclusion
Before investing in bonds, you should ensure to do your research, as with anything, if you were to become a fashion designer, you would ensure you have knowledge of the trends and materials, similar to if you were a beginner playing new casino games canada, you would make sure you understand the games beforehand, it is the same with bonds, having an idea what you are investing in is essential. As we have seen in this article, bonds are a good entryway into investing as they yield safer options and more stable long-term payouts. So, do plenty of research on bonds before getting into them, as while they are one of the simpler investment options, they still do not lack complexity.
About Post Author
