Bonds are generally considered lower risk than stocks, but they are not risk-free.
Here's why:
- Interest Rate Risk: When interest rates rise, the value of existing bonds falls. This is because investors can buy new bonds with higher interest rates, making older bonds less attractive.
- Inflation Risk: Inflation erodes the purchasing power of your investment. If inflation is higher than the interest rate on your bond, you may lose money in real terms.
- Credit Risk: The risk that the issuer of the bond may default on their debt. This is more likely with bonds issued by companies with lower credit ratings.
- Liquidity Risk: The risk that you may not be able to sell your bond quickly and easily at a fair price. This is more likely with bonds that are not traded frequently.
However, bonds also offer some advantages over stocks:
- Potential for Steady Income: Bonds typically pay regular interest payments, providing a source of income.
- Lower Volatility: Bonds generally experience less price fluctuation than stocks, making them a more stable investment.
It's important to remember that the risk of any investment depends on several factors, including the specific bond, the issuer, and the current market conditions.
Investing in bonds is not a guaranteed way to make money, but it can be a valuable part of a diversified investment portfolio.
