In the previous chapter we saw a part of the stock market where an investor can buy a share of a company.
In this way, not only do you have the opportunity to gain from the growth of the share price over time, but you can also have an income from dividends.
Another way of investing in the stock market is the purchase of bonds.
When an investor buys a bond, he lends money to a company for an agreed period of time and for a fixed or variable interest rate. A bond is commonly referred to as a debt investment or fixed-income security.
When companies need to raise funds to finance expansions or other projects, they sometimes issue bonds to investors instead of taking out a loan from a bank.
Initially, the company issues bonds for a fixed period, called the offer period.
After this period it is still possible to invest in bonds through the stock exchange, but the price to be paid depends on the market at the time of the investment, i.e. it will not be possible to buy the bond at the same price paid by the initial bond investors.
Why choose to invest in bonds rather than shares of a particular company?
If a company goes bankrupt, there is a hierarchy of how the remaining money of the assets is distributed.
When you are a shareholder, you have a shareholding in the company, while bondholders have a shareholding as creditors in the company.
Creditors have priority over shareholders in the payment hierarchy, which means that your money could be safer if you got it as a bond.
As a shareholder, however, you can hold your stake indefinitely and you can achieve a higher return if the company performs particularly well.
Bonds can be held to maturity, which is usually determined at the beginning (five years, ten years or more). You can sell your portfolio in advance, but you risk not getting its nominal value (the amount paid at the beginning).
The price you get depends on the interest rate request offered by the bond.
Like stocks, you can invest in a bond through an index fund or ETF.