Bonds are issued by corporations or governments when they need to raise cash. Sounds similar to stocks, right? Well, the big difference between bonds and stocks is that bonds represent debt. Rather than owning a portion of a company like you would by owning shares of stock, when you purchase a bond you are providing a loan in exchange for regular interest payments. Once your bond reaches its maturity date, the original amount you invested (the principal) is returned to you.
The only scenario in which you wouldn’t receive the principal is if the bond defaults. Bond defaults are rare, so bonds tend to be a less risky investment choice. It’s a good idea to include a mix of stocks and bonds in your portfolio in order to diversify. It’s also a good idea to review your ratio of stocks to bonds at various points throughout your lifetime as your goals and income streams change. As you get older, for example, you may want a more conservative investment strategy that leans more towards using bonds.
