Bonds, Gilts and Commodities
Steady on! I was just getting my head round 'stock,' 'share' and 'equity!'
Stick with me. It's not too hard. We will take it nice and slow.
Bonds
Bonds are another method used by companies to raise cash. They are a promise to repay a sum — effectively a loan from you to the company — with a certain level of interest due on a certain date.
Bonds are traditionally seen as a safer investment than stocks / shares / equities, but tend to give smaller returns and so have tended not to excite investors as much as the equity market — a safe port in a storm (or a bear market), that kind of thing. The 'historical outperformance of shares over bonds' is a commonly quoted statistic you might hear from academic economists.
Of course, a company could still go bust before it can pay out to its bondholders, or it may find that it just does not have the cash to pay up — so bonds are not that safe really — companies in difficulties are a common sight, which is why bonds are usually graded by rating agencies, e.g., Standard & Poor and Moody's are two of the best known.
The best rating a bond can have is AAA status, while the lowest CCC is known as a junk bond — a phrase which you have probably heard before. Junk bonds hit the headlines in the 1980s due to a number of financial scandals. Of course, because they are not so highly rated in terms of risk, lower grade bonds will offer higher rates of interest to tempt the investor.
Although owning a bond does not convey any ownership of the company, when a company goes belly up, i.e., is bankrupt and has to call in the receivers, bondholders are usually in a better position to receive any payouts or compensation than the shareholders — which is something worth considering.
During so-called bear markets, many investors will shift to bonds, but with the variety of securities / bets / derivatives that are, or are becoming, available to the smaller investor, this may become unnecessary in the future. Bonds are basically a bit dull.
Finally, we should emphasise that it is wrong to think of bonds as being 'totally safe' — this is a very common mistake made by people who have retreated from equities — as explained above, it is not the case.
Gilts
Gilts are a type of bond issued by the government. Usually these are considered to be very safe indeed — 'gilt-edged' — as the government is hardly likely to go bankrupt, is it now?!
Commodities
Commodities are very easy to understand. They are the original reason for having markets at all — they are things like tea, coffee beans, pork bellies, orange juice, oil and so on — tangible things that we all know and use personally.
Of course, these may seem to be of little interest to the private investor — i.e., you — after all, an individual is unlikely to want or need 35 tons of coffee beans for his own use, right (not even the most manic hacker)? While this is true, it is possible for the individual investor to trade commodities using futures, which are a type of derivative. More about this later.
Bonds, gilts and commodities are not considered in StockWave™ — but it is good to know what these things are. When trading it is important to become financially literate as quickly as possible, part of which is getting comfortable with the jargon.