Study bond and stock history.
With their different risk and reward profiles, stocks and bonds complement each other. Both are expected to provide positive returns. Stocks carry more risk. So trading requires diversification. Choose a portfolio of stocks in different sectors that minimize risk but maximize return. Trading bonds involves understanding the limits of the credit backing the security and the increased risk as one extends the maturity of the bond.
Bonds Are Promises to Pay
Bonds are less risky than stocks.
Fixed-income instruments include short-term securities called bills or money-market instruments that come due within a year of issuance. Notes have a maturity up to 10 years; bonds are fixed income securities due in more than 10 years. There are also variable-rate notes, such as mortgages, that change interest regularly. Interest-rate movement causes bond prices to rise and fall in inverse relation to their yields.
StocksAare Affected by Many Trends
Stocks trade on exchanges.
Stock prices are also affected by interest rates as investors demand more dividend yield when interest rates are increasing. In addition, stock prices are affected by the general level of profitability of the industry and sector trends of business. Stock prices can vary greatly by country. And stock prices are affected by expectations of future corporate earnings.
Trading Stocks and Bonds
Bonds trade on the over-the-counter market
Trading stocks for long-term growth is best done by investing in stocks in important businesses with very good balance sheets. Earnings growth, hence higher stock prices and dividends, is easier to anticipate and these stocks tend to outperform the market in both rising and declining markets. Bonds should be purchased after ascertaining that interest and principal is firmly secured. This is done by pledging sufficient collateral to repay debt service. The bond prospectus, available from the issuer, brokerage firms or credit rating agencies, provides such information.
Where to Trade Bonds
Reinvestment of coupons and dividends creates wealth.
Unlike the stock market, bonds tend to trade without a central exchange. Most bond dealers have their own inventory of bonds and set prices themselves. New-issue bond trading involves buying debt recently brought to market. At that time, all dealers must offer all bonds at the same yield and price and the issuer pays the commission. Transaction costs of bond trading are relatively high and bonds must be traded in large quantities as price movement is much slower than with stocks.
Where to Trade Stocks
Stocks are traded on major exchanges throughout the world. The network of members of each exchange are called brokers. It is the responsibility of the exchange and broker to offer stocks at current market prices. Trading on a short-term basis is difficult and requires substantial discipline. Traders must make trading plans that limit losses and allow profits to accrue. Traders should practice trading plans on paper before transacting real trades.
