Bond market
The bond market is where companies and governments go when they need to raise money. A bond is nothing more than a loan. Since it is a loan the amount of interest is fixed. This means that the price won’t fluctuate the same way that stocks do. That allows you to add some stability to your portfolio. In general the return you get with bonds will be less than with stocks but the stability makes them a good option for shorter time horizons. With bonds you don’t have to worry about the market crashing right before you need your money.
The bond market is generally considered to be a good investment option for people who need a stable place to put their money for fairly short time periods. Over periods of about ten years or longer you would be better off putting your money into the stock market. The returns over that time frame are almost always more than you would get with the bond market. However over shorter periods the fluctuations of the stock market can make it a poor investment option. If you are going to need your money in short time you would be better off with bonds. You will get a lower return but it will be more stable.
It should be kept in mind that the bond market is not a guaranteed investment. You can lose money by investing in bonds. The most serious risk is that the company that issued the bonds will go bankrupt; if this happens there is a good chance that you will lose your money. The other risk is changes in the interest rate. If interest rates rise the value of your bonds will go down because newer bonds being issued will have a higher rate of return. This isn’t an issue if you are holding the bonds until maturity but even then you are getting a lower return than you could be.
One of the reasons that most people don’t invest in bonds is that they don’t really understand them. The vast majority of bonds are bought and sold by professionals working on behalf of large funds like mutual funds or pension funds. Bonds can really be quite complicated and that intimidates a lot of people who don’t really understand why the prices fluctuate or even the terminology for that matter. This tends to keep the average investor out of the bond market.
Since bonds are an important part of most investment portfolios because of the stability they add it is a good idea to try to understand them. However for most people the best way to invest in them is to actually put your money into a bond fund. This works just like any other mutual fund. There will be a professional manager who will buy and sell the bonds on the funds behalf. This will allow you to invest in bonds without really having to understand all the detail of how they work.