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Bonds - what are they and how to make money on them?

How to make money on bonds

Even a novice investor can easily make money with bonds. In the article we will tell you what bonds are, what types there are, evaluate their profitability, talk about the benefits and possible risks.

In simple terms, bonds are a kind of IOUs issued by companies or issuing countries that need money. These assets are good for the investor because he knows in advance when and how much he will receive income.
The main risk of an investor is the bankruptcy of the borrower (issuer). In this case, you can lose all invested funds: unlike deposits, there is no deposit insurance here.

Types of bonds

There are various types of bonds on the stock market, let's consider them in more detail.

Depending on the issuer:

Depending on the maturities of the bonds:

By convertibility:

Depending on the collateral:

Depending on the circulation of bonds:

And the last type of bonds under the terms of income payments:

The issuer of structural and investment bonds is a financial institution that invests the funds received in various stock instruments. It is better for a novice investor to avoid such transactions, because these are complex financial products and their profitability is difficult to predict.

Payment of taxes

When dealing with bonds, you will have to pay taxes. However, it is worth considering:
the investor is entitled to a tax deduction if he bought bonds through IIS - an individual investment account;
the investor automatically pays income tax on income, it is calculated and removed by the issuer himself;
if the owner of the bond sells it, the income tax is withheld by the broker;
personal income tax is always deducted from income, with the exception of some points. For example, if an investor sells bonds, then personal income tax may not be paid if his earnings for the year amounted to less than three million rubles; if you bought securities on the stock exchange; if kept for more than three years.

What are the risks

The risk is inevitable. When buying bonds, you need to calculate:
Interest rate risk: An investor risks that average rates on similar securities will increase. In simple words, an investor could earn more if he chose a different type of securities.
Liquidity risk: if an investor wants to sell bonds ahead of schedule, there may not be buyers for them. This happens if the issuing company has financial difficulties or is simply unknown to the general public.
Liability restructuring risk: the issuer may change the payment term, maturity of the bonds, or the amount of interest.
Inflationary risk: when inflation rises, it can “eat up” all your income and you can even remain at a loss.
Default risk: The company may go bankrupt. But if you have secured bonds, chances are you will get your funds back.

Minimizing risks

High asset security - small and stable profits, risky assets bring high returns, but can lead to full funds. How can you find a middle ground here, multiply without succumbing to bad advice and without losing your investments?

Summing up

If you do not want to risk, choose government bonds. They are not very profitable, but still your money is not afraid of inflation. Bonds of large companies can also be called reliable, they have an average yield. Ready to take a risk? Part of the money can be invested in more profitable bonds of companies that have an average credit rating of "B".

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