ABCs of Investing

Fixed income investments are defined as securities that have a regular fixed return associated with them as well as having a guaranteed principal.  This investment asset class is often considered less risky than buying stocks which isn’t always true since some fixed income investments are very risky.

A fixed income security is only as good as the organization that issues it.  If you buy a bond from a company and they don’t have any money to pay the interest, then you are out of luck.  Worst case scenario is the company goes bankrupt, in which case you probably won’t get your original investment back.  On the other hand, a bond issued by the United States government is about as safe as you can buy.

Here are some examples of fixed income investments

Regular bonds are investments where you lend money to a government or company in return for periodic interest payments.  At the end of the bond term you will receive your original investment back.  For example you might buy a bond for $5,000 that pays 4% per year for 10 years.

Preferred shares – these are special shares issued by companies that have a fixed dividend attached to it.  These are normally defined as fixed income but share some characteristics with regular stocks.

Zero coupon bonds still involve lending money to a government or company but instead of receiving regular interest payments you get the “interest” at the end of the term.  For example you might buy a zero coupon bond for $500 and after 7 years, the borrower will pay you $900.

TIPS – these are inflation-protected bonds issued by the US government.  These tend to pay a low return but because the inflation index is built in, they can be a good hedge or guard against high inflation.