Investing money can take many different avenues. You can invest your money into traditional investments such as stocks and bonds, or you can lend money to a specific person for start-up costs for a business. An investment occurs when you lend money to someone who will pay you back with interest, pay you back in the businesses income, or trade the ownership you have in that company.
When you think of investments, you probably think of bonds because they are one of the most common. Governments and corporations issue bonds to raise money for growth and the running of the business. A bond is basically a loan from you to them.
A bond is most often issued at $1,000. One bond will cost $1,000. If you buy savings bonds you can buy them in other denominations such as $25, $50, $100, etc. Savings bonds are common gifts for birthdays and graduations, so you might even have a few yourself.
There are a few different ways to earn money from a bond investment. The most obvious is through interest. If you buy a $1,000 bond with a 3% interest rate, you will be paid $30 a year. You will get your payment annually, semiannually, or sometimes they pay it all at once at the end when the initial loan is repaid.
You can also make money when paying a discount. If you pay a premium for a bond, meaning for a $1,000 bond you pay more such as $1,050, you are making less, but this happens more often with a bond that has a higher rate. A discount would mean you pay less such as paying $960 for a $1,000 bond.
You can also trade bonds. All bonds have different maturity times. Short term bonds usually mature in six months or less and long term bonds can mature in as much as 30 years. You can sell them or buy them within that time for a profit.
A corporation is selling bonds with a face value of $1,000 for $960 each. You buy 20 of these bonds. They have an interest rate of 5% and mature in 10 years. You pay $19,200 for $20,000 worth of bonds. Each year you will receive $1,000 in interest. When it matures you will be repaid $20,000. You will have made $10,000 in interest and $800 from the discount for a total of $10,800.
Any of these bonds could have been sold before maturity, as long as someone wanted to pay for them. You should focus more of your investments on bonds if you are close to retirement, otherwise you should invest more in the stock market because you will make more money.