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What can I do with my money? |
Bonds
What is a Bond
A bond is a financial product where you loan your money to a bank, government, business or municipality for a set period of time. For example, Volkswagen has just issued a 5 year bond. If you buy one of the bonds for £100, you can receive interest for that loan every month for 5 years. At the end of those 5 years, you then receive your £100 back. You'll generally have to keep the bond for 5 years and not less. However, you may be able to sell the bond on the stock market if you initially purchased it there.
Bear in mind that buying Volkswagen bonds does not give you ownership of Volkswagen. To get ownership, you'll need to get shares.
The basic information you need to know about a bond are as follows:
Bond Issuer: this can be City of London, the German Government, or a bank like Santander
Maturity date: tells you how long you have to hold the bond for. Typically, the longer the term, the higher the interest paid
Coupon/Interest rate: the interest rate can be paid monthly, bi-annual or annual payment. It can also be fixed or variable.
How long do I invest in a bond
The term for bonds differ depending on the product you choose.
Depending on the issuer, Bonds are typically seen as low risk. For example, the UK government regularly issues a Gilt which is the name of a government bond. The UK government would have to go bankrupt in order for you to lose your investment and since that probability is low, your risk and relative return is low.
The main benefits of bonds over cash cash is that:
On the other hand, government bonds of high risk countries, countries with unstable governments, economic instability can provide high returns but also carry high risk. If a government were to default on its loans, you are likely to lose your investment.
Bond Saving Accounts
Retail banks typically have products that allow you to invest in bonds. The minimum you can invest ranges from £1 to £500 plus. I have a 5 year fixed rate bond that pays a gross annual interest of 2.23% . I have found bonds to be a good safe space to build my cash asset over a long period of time. You can hold these bonds in your Cash ISA for tax efficiency.
Bonds on the Stock Market
Bonds can also be bought on the stock market and held in your Stocks & Shares ISA where possible. The stock market also allows you to access bonds from foreign issuers. This can help you build a more diversified portfolio. You can select the bonds you wish to buy or use managed funds such as ETFs (read more below). Bonds returns vary but the highest I have seen so far has an interest of 9% with minimum investment of £1000.
A bond is a financial product where you loan your money to a bank, government, business or municipality for a set period of time. For example, Volkswagen has just issued a 5 year bond. If you buy one of the bonds for £100, you can receive interest for that loan every month for 5 years. At the end of those 5 years, you then receive your £100 back. You'll generally have to keep the bond for 5 years and not less. However, you may be able to sell the bond on the stock market if you initially purchased it there.
Bear in mind that buying Volkswagen bonds does not give you ownership of Volkswagen. To get ownership, you'll need to get shares.
The basic information you need to know about a bond are as follows:
Bond Issuer: this can be City of London, the German Government, or a bank like Santander
Maturity date: tells you how long you have to hold the bond for. Typically, the longer the term, the higher the interest paid
Coupon/Interest rate: the interest rate can be paid monthly, bi-annual or annual payment. It can also be fixed or variable.
- Fixed Interest: for the entire period which you hold the bond, the interest rate remains the same
- Variable Interest: the interest rate will change typically in relation to the central banks rate
How long do I invest in a bond
The term for bonds differ depending on the product you choose.
- Bonds can be held for 1, 5, 20 years and more.
- For the duration that you choose, you are likely not to be able to access your investment. So read the product terms to learn more.
- For the duration that you have the bond, you will receive a monthly income
Depending on the issuer, Bonds are typically seen as low risk. For example, the UK government regularly issues a Gilt which is the name of a government bond. The UK government would have to go bankrupt in order for you to lose your investment and since that probability is low, your risk and relative return is low.
The main benefits of bonds over cash cash is that:
- It stops you from having the temptation of taking your money out.
- You get a fixed income in the form of monthly interest payment that are often higher than what you would get from your retail bank.
On the other hand, government bonds of high risk countries, countries with unstable governments, economic instability can provide high returns but also carry high risk. If a government were to default on its loans, you are likely to lose your investment.
Bond Saving Accounts
Retail banks typically have products that allow you to invest in bonds. The minimum you can invest ranges from £1 to £500 plus. I have a 5 year fixed rate bond that pays a gross annual interest of 2.23% . I have found bonds to be a good safe space to build my cash asset over a long period of time. You can hold these bonds in your Cash ISA for tax efficiency.
Bonds on the Stock Market
Bonds can also be bought on the stock market and held in your Stocks & Shares ISA where possible. The stock market also allows you to access bonds from foreign issuers. This can help you build a more diversified portfolio. You can select the bonds you wish to buy or use managed funds such as ETFs (read more below). Bonds returns vary but the highest I have seen so far has an interest of 9% with minimum investment of £1000.
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Disclaimer
The content on WealthSquats are my own thoughts. Consult certified financial experts to get information that is suitable to you.
The content on WealthSquats are my own thoughts. Consult certified financial experts to get information that is suitable to you.
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