What are bonds and how do they work ?

Bonds on the stock market

While most stock market investors know what a stock is, some people are less sure about bonds, another purchase option. Let's take a closer look at this investment, also known as a fixed income security !

What are bonds ?

Understanding the stock market is essential for anyone who wants to grow their investments. Wondering what a bond is? A bond is simply a fraction of a debt. It allows an issuer to establish an acknowledgement of debt towards a purchaser.

How do bonds work on the stock market?

Issuers of bonds are usually governments, communities and public or private companies. These securities allow them to raise funds. The amount initially loaned to the purchaser is the face value of the bond. The duration of this investment is limited. The date on which it must be fully repaid is called the maturity date. In exchange for his capital, the purchaser receives interest. This interest is also called a coupon. Its rate can be fixed or variable, if it depends on an external reference.

How is it paid ? There are several solutions. It can be given to the purchaser :

  • per quarter
  • per semester
  • per year
  • in full at maturity with repayment of the purchase price at issue

Bonds can be freely traded on the stock exchange. They therefore have a quotation price.

Bonds on the stock market: what are the risks ?

Like any investment in the stock market, bonds entail certain risks that you must take the time to evaluate when deciding to invest. What are these risks ?

  • The risk of default at maturity : this is directly linked to the solvency of the issuer of the securities. This risk mainly concerns bonds that, by contract, do not give rise to a total reimbursement of the initial investment. There is then a risk of loss of capital.
  • Lifetime risk : during the lifetime of a security, its price changes according to market interest rates. If you decide to sell your bonds before their maturity, you may lose your capital or your gain.
  • Resale risk : The bond market, also known as the bond market, is illiquid. What does this mean? There is less trading in bonds than in stocks on the stock market. Therefore, it is likely to be difficult to find a buyer and therefore lose liquidity.