In Wednesday's Digest, I showed you why most investors should focus on bonds... not stocks. Yes, that's a curious thing for a newsletter publisher like me to write about. After all, most of our products focus on stocks.

But I know it's true. Bonds are far safer than stocks and, if you'll use just a bit of common sense, you can easily make more money in bonds than you will in most stocks. Unfortunately, outside of our own True Income letter, there's very little written about how to invest in bonds. How can you get started without buying an expensive newsletter?

Now... Check out this website. It's the website for the Financial Industry Regulatory Authority (FINRA) - the brokerage industry's self-police. Among its other functions, FINRA keeps tabs on the bond market by collecting trading information.

Using the FINRA website, you can access market information on bonds by simply typing in the symbol of the company whose debt securities you're interested in. For example, you can choose to search for bonds by "symbol." So to look up Ford's bonds, I just punch in "F" - and, presto, all of Ford's bonds that have traded recently will appear.

What's my best advice on bonds? First, never buy a bond unless you're certain the collateral value of the bond will cover 100% of the debt. Just like you wouldn't make a loan to a stranger without collateral, likewise you shouldn't lend to corporations without coverage.

Second, make sure you're going to earn an interest rate that's commensurate with the risk of default. Even if you're protected by collateral, you don't want your money stuck in a bankrupt bond for 24 months without getting any interest. So if you think a company might be in trouble, make sure you're getting paid a high rate of interest.

Finally, I'd never buy a corporate bond at anything near par (usually $100). Why? That's one of the big secrets of the bond market...

At least once every 10 years, investors dump corporate bonds en masse. When they do, you will have the opportunity to buy safe corporate bonds for around 50 cents on the dollar. That means you'll get a big capital gain when the company redeems the bond at par ($100), and it means the yield you'll earn for the duration of the bond will be 100% bigger than normal.

Think about it. If you buy a 10-year bond at par ($100) that's paying a $10 coupon, you'll earn 10% a year for the duration of the bond. At the end of 10 years, you'll have earned $100 in interest. And you'll get $100 in capital returned as well. Your $100 has turned into $200 - that's a 100% gain.

But... imagine if you bought the same bond for $50. You'd still get $10 a year for 10 years. And you'd get $100 when the bond was due. Your $50 would turn into $200. That's a 300% gain. Buying corporate bonds at a big discount is both vastly more profitable and much safer. (You obviously don't need as much collateral to protect you if you're buying a bond at 50 cents on the dollar.)

Just to reiterate what I told you on Wednesday, bonds are vastly safer than stocks. They can make you a tremendous amount of money - if you have the discipline to wait and only buy when bonds offer safety, high yields, and significant capital gains.

source HERE

Posted by Mr Thx Tuesday, January 19, 2010


Post a Comment

Related Posts Plugin for WordPress, Blogger...

Sekapur Sirih Seulas Pinang

My photo
Alor Gajah, Melaka, Malaysia
Sharing is caring. This blog is about sharing information that available in web space. The information is related to Finance, Business & Trading.

Enter your email address:

Delivered by FeedBurner