Wednesday, December 29, 2010

Bond Trading Versus Stock Trading

Bond Trading Versus Stock Trading

Guest Article

Overview of bond trading

In the financial and investment market, bonds refer to a type of debt security whereby the issuer of the bond owes the purchaser a debt. Depending on the specific terms of the bond, the issuer is obligated to paying the purchaser interest and/or repays the total principle to the purchaser at a later date. This date is referred to as the maturity day. It is a formal financial contract the borrowed money is repaid with interest included and paid at fixed intervals throughout the life of that contract.

There are numerous types of bonds such as bearer bonds, fixed-rate, and many others. However one of the most common and popular are the municipal bonds which are typically issued by different government agencies such as a city or local governments, state governments, or US territories. The interest that the purchaser of the bond receives is normally exempt from federal and state income taxes.

Overview of stock trading

Even though stock trading is a common terminology, it is actually a misnomer because you really don’t trade shares of stock. You purchase them for the purposes of selling them at a profit. In the language of the financial and investment markets, you purchase and sell shares of stock either on the floor of one of the different stock exchanges or online. Additionally, the individual who purchases and sells shares of stocks is referred to as a stock trader.

Advantages and disadvantages bond trading

As with any type of financial and investment instrument, there are certain advantages and disadvantages to trading bonds. Although they tend to be much less aggressive than shares of stocks typically are, they usually provide the investor with a steady income stream. Over the long-term, this means that their performance might be poorer than what you would experience with stocks. Additionally, and like other investments, there are certain risks involved with bond investing.

The two primary advantages are those involving income and ratings. The income advantage is the fact that they are a safer investment than stocks while the rating advantage is a system that enables the investor to gauge a bond’s reliability. The key disadvantages involve risk and security. The former is associated with the fact that you can’t always trust those systems that rate bonds. The security disadvantage refers to the fact that the bond is only as good as what the borrower’s ability to repay the loan is.

Advantages and disadvantages of stock trading

As with trading in the bond market there are certain advantages and disadvantages where stock trading is concerned that you need to be aware of:

The key advantages are:

o better returns on one’s investment
o familiarity with the larger companies
o wide range of investment choices

The key disadvantages include:

o cost of shares
o leverage is typically lower than other forms of investments such as the FOREX market
o uptick rules regarding short selling meaning that you have to wait for the price of the stock to increase before you can short sell it

No comments: