The recent sell off has caused many stock market investors to start to evaluate their income producing stock portfolio.  There is a definite feeling in the air that safety is starting to trump returns when it comes to the best income investments.  No question that the stock market will remain the number one source for the best income investments for the foreseeable future.  However, the most savvy investors are starting to diversify into other markets to mitigate stock market risk.

Every time the stock market starts to gets volatile, some investors start to move their investments into a safer financial income market.

The most common market for stock market investors to diversify into is the bond market.  However, most stock market investors know very little about the bond market.

What is a bond?

A bond is a type of loan taking out by a company.  In exchange for the money, the company pay an interest rate (coupon) generally annually or semi-annually.  At the maturity date of the loan, the company returns the principal which ends the loan.

There is much difference between bonds and this is based on the bonds legal document known as the indenture.  The indenture outlines the characteristics of the bond.  This is very unlike stocks that are all fairly similar in terms of structure.

 Two Bond Terms

Secured/Unsecured—Bonds can be unsecured or secured depending on the indenture. Unsecured bonds are known as debentures.  Debentures are only guaranteed by the credit worthiness of the company issuing them.  A secured bond is collateralized by certain assets owned by the company.  Once again this is outlined in the indenture.  If the company goes bankrupt, these assets are sold off and the proceeds are distributed to the bond owners.

Maturity—This is the date that the bond will return its loan to the bond holders.