What is dollar-cost averaging? Let’s say you’ve got $100,000 to invest in shares but you’re nervous about the market.

What if the doomsayers are correct and we’re heading for further economic and market woes? You can ignore the risks and put your $100,000 in now; keep the money in cash and wait until you’re sure the outlook is OK (which could mean keeping it in cash indefinitely); or you could compromise and invest your $100,000 over, say, 10 months with contributions of $10,000 each month.

The third strategy is dollar-cost averaging. It can be done through either regular saving (super is a great example, as a percentage of your salary is invested regularly without you having to do anything about it) or drip-feeding a lump sum into investment markets.

Instead of putting all of your investment money in at once (and risking the chance that the market might tank tomorrow), you average out your entry price so that your overall return is more likely to reflect that of average market returns.

So how does it work? Think of it as a strategy where you automatically buy more when investments are cheap and less when they’re overvalued. To take a very simple example, assume you want to invest $1000 a month in a share fund. The units are currently valued at $1 each so you buy 1000 units this month. By April, the market has risen 20 per cent. Your $1000 will buy 833 units. In May, the doomsayers are proven correct and the market crashes by 50 per cent. Your $1000 will now buy 1667 units in the share fund.

So you have 3500 units worth $2100 - a loss of 30 per cent on your investment. If you had invested the full $3000 in the beginning, however, you would have only 3000 units worth $1800 - a loss of 40 per cent.

If the market recovered a further 50 per cent in June, units in the share fund would be back to 90¢. After buying another 1111 units, you’d have 4611 units worth $4150 - a 3.75 per cent gain on the $4000 you had invested. But if you had invested the full $4000 in the beginning, your 4000 units would be worth just $3600 - a loss of 10 per cent.

Dollar-cost averaging is most advantageous at market peaks as it shields you from the risk of putting all your money in at the wrong time. However it can reduce your return when markets are rising. If you had received a lump sum in early March last year, for example, you would have been much better off investing it immediately than drip-feeding it into the market.

In a recent briefing, NAB Private Wealth said critics argued that because share prices historically rose more often than they fell, investors using dollar-cost averaging were likely to pay higher average prices than investors who jumped in boots and all.

However, this argument overlooks human psychology. Most investors are reluctant to put money into shares when the outlook is grim but happy to do so when prices are high. Instead of investing their lump sum last March, for example, many investors would have kept it in cash and missed out on part or all of the upturn.

How do I use dollar-cost averaging? Bailey says it works best with long-term regular savings such as super, as the process is automatic and your portfolio has time to benefit from buying more units or shares when prices are low. Setting up an automatic regular savings plan also avoids the temptation to try to second-guess the market by postponing regular investments when prices are falling and catching up later when the market looks more promising.

You can set up regular savings plans outside super but NAB warns it could involve higher transaction costs than investing a single larger amount and may be more complicated to track and implement. If you’re considering using dollar-cost averaging to get back into the sharemarket, NAB says studies suggest shorter periods (six to 12 months) to become fully invested give better returns than longer periods.

Reference: Sydney Morning Herald.

With the property market becoming more valuable, there are more and more strategies becoming more popular. I think some of the readers of this blog, some of these strategies might come in handy to give some options of getting in and ahead.

Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to circumvent alienation clauses in mortgages. Proponents claimed the sale was not really a sale because it was a lease; however, courts argued otherwise.

Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.

Basics of an Option

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.
• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.
• The term of the option agreement is negotiable, but the common length is generally from one year to three years.
• Option money is rarely refundable.
• Nobody else can buy the property during the option period.
• The buyer can sell the option to somebody else.
• If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.
• The buyer is not obligated to buy the property.

Basics of a Lease Option

• Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.
• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.
• During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.
• The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.
• The option money generally does not apply toward the down payment.
• A portion of the monthly rental payment typically applies toward the purchase price.
• Option money is rarely refundable.
• Nobody else can buy the property during the lease option period.
• The buyer generally cannot assign the lease option without seller approval.
• If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.
• The buyer is not obligated to buy the property.

Basics of a Lease Purchase

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.
• Buyer and seller agree on a purchase price, often at or a bit higher than market value.
• During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.
• The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.
• The option money generally does not apply toward the down payment.
• A portion of the monthly lease payment typically applies toward the purchase price.
• Option money is nonrefundable.
• Nobody else can buy the property unless the buyer defaults.
• The buyer typically cannot assign the lease purchase agreement without seller approval.
• Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.
• The buyer is obligated to buy the property.

Doing a Lease Option / Lease Purchase

Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.

Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:

• Get a home inspection.
• Examine the title policy.
• Obtain an appraisal.
• Read seller disclosures.
• Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.

• Sellers generally get market value at today’s prices and relief from paying a mortgage on a vacant property.
• Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.
• Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership.
• Buyers also receive a forced savings plan since part of the lease payment is credited toward the purchase price at the end of the lease option agreement.
• If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money and may retain the right to sue for specific performance.

For more information, contact a real estate lawyer.

By Elizabeth Weintraub, About.com Guide

It is a constant debate: what is the best investment? Is it shares or property? Should you buy gold bullion or tip extra money into your superannuation?

Lets have a look back at the past decade to see how these investments have performed.

Gold is the winner for pure gains but a rising Aussie dollar rubbed off some of the shine. Still, in $US per ounce it’s up a massive 284 per cent.

Houses

The median Australian house price has climbed 127 per cent in the past decade but there are big differences between the best and worst.

The big winners are Darwin (up 223 per cent), Hobart and Perth (both 208 per cent), data from the Real Estate Institute of Australia has found.

Adelaide’s median house price has climbed 176 per cent during the decade.

As a rule of thumb, residential property doubles every 10 years.

Sydney was the only city to underperform, with a 93 per cent increase.

However, this does not tell the whole story. The median Sydney price, currently at $569,000 is still below its $571,000 high in 2004.

Shares

It has been a rocky road for shares during the past decade, with two bear markets and a long boom. The All Ordinaries index of 500 companies is up 49 per cent over the past 10 years.

Australian Stock Report head of research Steven Dooley says the energy sector had a great decade as the oil price rose from about $US10 a barrel to highs near $US150 in mid-2008.

Consumer staples companies showed that slow and steady wins the race.

Superannuation

Super is technically not an asset it’s a structure to hold your investments and it has been hit for six during the past 18 months.

However, it’s on the way back up again, and for the decade the average balanced fund has still climbed 72 per cent.

The global financial crisis wiped 20 per cent off the average balanced fund in 2008, while the year before super was down 6.4 per cent.

But the GFC was not the only glitch during the decade. The 2002 Asian financial crisis caused losses of almost 5 per cent.

“The funds soon shook that off, however, and we had five strong years of predominantly double-digit growth,” SuperRatings chief operating officer Nathan McPhee says.

“People soon just expected that those extraordinary levels of growth were normal.”

Wine

Australians’ love of wine can be justified by investors to a point. Average prices of premium reds have climbed 78 per cent, although most wine is still traded on the secondary market for pleasure.

“The fine wine market is today’s modern spice trade,” Langton’s auctioneer Andrew Caillard says.

During the past 10 years, however, the wine market has developed a bit of a “cult phenomenon” where unheard-of wines can fetch more than $1000 a bottle.

“Don’t borrow money to buy wine. There are no guarantees of making returns,” Mr Caillard says.

Very rare wines, however, are a market to themselves with some Australian rare wine up 300 per cent this year.

Cash

It has been an uneventful start and finish for cash investments for the decade.

In December 1999 the average one-year, fixed-term deposit rate was 5.22 per cent.

Today it is 5.09 per cent, according to RateCity. The average during the decade was 5.3 per cent.

Unlike shares and property, cash does not deliver capital growth only income but is seen as a safe investment.

HSBC has some great offers currently. You can find them here.

Commercial Property

Listed property trusts offer the easiest access for investors to commercial property but what a shocker of a decade for this sector. The Listed Property Trust index fell 31 per cent.

During the decade, many trusts started at just 50 per unit, rode the back of the global property bubble up to $8 or $9 then tumbled back again, Australian Stock Report’s Steven Dooley says. Other trusts were wiped out.

Thoroughbreds

The average yearling sale price has jumped 88 per cent during the decade.

“The globalisation of the industry has been a boon to Australian horses because it has brought international investment and recognition during the past 10 years,” Inglis commercial manager Matt Rudolph says.

“In Australia, anyone can be an investor but in the UK or Europe, for example, it is often only for the elite. Here you can dream of winning a Golden Slipper or a Melbourne Cup. You only have to have a look at the past winners to see it can happen.”

Gold

If you put your money in gold 10 years ago, you’d be on a winner, with 284 per cent growth.

Although currency fluctuations have boosted the price recently, the sector is still seen as a haven and a growth asset.

There is a real bull market in gold, says Daily Reckoning gold analyst Bill Bonner.

“It’s what you buy when you think government is making a mess of the monetary situation. You put your trust in gold as an antidote, as protection, as wealth insurance.”

Diamonds

Diamonds have not been a girl’s best friend this decade, with virtually no growth a mere 0.5 per cent.

According to the international benchmark index of South Africa’s PolishedPrices.com, diamond prices roughly ended the past 10 years at the same place they started. However there were a few ups and downs.

PolishedPrices spokesman Richard Platt says diamonds reached a peak in August last year, but even that high translated to a mere 18 per cent increase since 1999.

So, the next time you are told in the jewellery store that it’s a ‘great investment’, refer them to this article.

Where have you found some great value from investments?

PD

As a parent you have an important role to play in teaching your kids about money. This can be a challenge as you may feel torn between giving them what you can but at the same time wanting them to be responsible with money. The best place to start is with you. By being better with money yourself you are teaching your kids to be better with their money.

Where did you learn your money attitudes and habits from? Our parents usually influence how we deal with money – even if we decide not to do what they did! You can set a good example for your kids by following some good, basic money management habits yourself, and reinforcing the lessons your kids are taught in school.

Get into the habit and take control of your money!

Write down what comes in and where your money goes each fortnight.

Are you spending more than you earn? Which items in your budget would you

describe as essentials and which would you describe as extras? Is there any

room to make changes?

Setting goals gives you something to work towards with any savings you have

found from your budget plan. Make your goals realistic. No matter how big or

small the goal is, the key is to work out how much you need to save and how

long it will take to get there. Talk to your kids about the family’s goals and help

them to identify their own goals too.

The secret to successful saving is to start now, no matter how small the

amount is. And don’t forget to look at your super. Superannuation is a

form of saving for your retirement and the sooner you take charge of

it the better off you will be. One of the consultants at PDFinancial Group can help you determine how much you need in retirement and explain some options.

Pocket money is often the subject of much debate among parents. You might find that the kids raise it with you before you’ve decided which way to go.

Think about your values and what you want to achieve with pocket money, decide on your approach, and explain your reasons to the kids. Pocket money can teach children the basics of budgeting. It can help children to learn about prioritizing their spending, which is the key to successful budgeting. They have a finite amount of money which they have to manage. It can also be used to introduce the idea of saving. Here are a few thoughts to help you manage the pocket money issue:

Decide on your goals for what you want to achieve with giving pocket money.

Be clear about what you expect your kids to do with the money. For example, do they need to use it for their canteen lunch at school? (Is it to be used for treats of their choice?)

Decide if you will pay a regular amount each week or whether you will only pay if certain jobs are done, like setting the table or making their bed.

Start early - talk to your children about money and help them to establish some good habits from an early age.

Show kids the value of money by explaining what $2 can buy.

Let them watch you pay for things – allow your child to hand over the money or press the OK button on the EFTPOS machine.

If you are giving pocket money, give a combination of notes and coins. This helps to familiarise kids with the different denominations and can assist in teaching them how to allocate money.

Teach kids how to compare prices and shop around. Use things that they like as examples.

Include your kids in conversations about the family budget and bills. (depending on how old they are of course)

Show older children what bills look like and how you plan to pay them. This is especially good for teenagers, considering the amount of money they spend on mobile phone bills!

Get your kids into the savings habit by helping them start a savings account. A good saver is HSBC saver with a high interest rate.

Assist them to identify their goals and how they are going to reach them. Be realistic – make sure they can reach their goals.

To make it fun, encourage small children to draw pictures of what they want to save for. This, along with any tricks you have picked up along the way should set your kids up to have good savings habits.

Paul Davies

Australians need to look at long-term saving options that sit outside superannuation if they are to have enough money to maintain their current lifestyle in retirement, according to investment group IOOF Research from the firm has shown more than a third of respondents to its consumer survey believe they will not have enough money to maintain their current lifestyle when they retire, with only 29 per cent believing they could carry on as normal. More than one-third of survey respondents still plan to use superannuation as their sole source of income.

“It’s alarming to find out that many Australians believe compulsory superannuation will be enough to maintain their current standard of living, the harsh reality is that in many cases it won’t,” said IOOF’s investor solutions general manager, Renato Mota.

Mota added that those looking to top up their super through voluntary contributions would find their saving potential has been limited following recent cap reductions imposed on voluntary contribution levels. As a result, he advised consumers to look at a selection of investment vehicles as a means of saving for retirement.

IOOF’s survey, which was conducted by AC Neilsen, found 33 per cent of respondents saw retirement as the most important thing for which to save, however, almost one-third had yet to begin long-term planning. Shockingly, despite the lack of financial knowledge among Australians, almost 80 per cent of respondents had not sought professional financial advice for their retirement.

If you need help with determining how much you will n eed in retirement and how to get there, please feel free to contact me at super@protectmywealth.com.au

Source: Moneymanagement.com.au
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An interesting story in News today about the promising property cycle in Australia. This is not just a property spruik, but contains some great ‘facts’ about why this is the case. Like I’ve been telling for quite a while, now is the time to invest for the long term. The wealthy of tomorrow are the ones who acted at this time in history, but ONLY if you are financially able to do it (and stick to the investment rules of location).

AUSTRALIA’’s property sector is about to catch a wave but homeowners and investors do not need to worry about a wipe-out.

While a bubble in the first home owner segment of the housing market is set to burst with the winding back of government grants in two months, industry experts say investors will fill the breach.

They don’t expect the property market to follow the big slumps felt in Britain and the US, where prices have fallen by more than 20 per cent.

In the US, in particular, the problem is too much supply and not enough demand.

“Fundamentally, America has 1.1 million properties in oversupply,” says Damon Nagel, the managing director of property investment  company Ironfish.

“In Australia, it’s more than 180,000 in undersupply. We can keep building for 18 months and only catch up to demand.”

But the buyers of property are expected to increasingly be investors, rather than owner occupiers, once the Federal Government First Home Owner Grant starts to wind down from September 30.

“I think you’ll find first home buyers next year will be like rocking horse droppings – few and far between,” Nagel says.

Professionals Real Estate Group agency principal Claudine Deneuve says buyer inquiries have risen as people realise interest rates are unlikely to fall further.

She’s expecting investors to return to the market as first home owner activity falls in coming months.

“House-price growth will be fairly moderate, with a much slower global economy,” Deneuve says.

“We have avoided the 30-40 per cent drops of the US and UK because our economy was in far better shape than our peers at the start of this historic global recession.

“If the global recession drags out too long, Australia’s economy may become at risk.”

A report released last month by forecaster BIS Shrapnel says conditions are ripe for a sustained recovery in residential property prices.

“Low interest rates, solid growth in rents and housing shortages are evident in most markets,” the report says.

But not everybody believes the outlook is for growth.

Morgan Stanley chief economist Gerard Minack says Australian residential property remains expensive “and will likely prove to be a poor medium-term investment”.

“Whether there are big price declines will depend on employment,” he says.

“In markets where employment and incomes have taken a big hit . . . we have seen big price declines.”

But some do not think prices will drop while houses are still in short supply.

“Demand stems from population growth,” .

“With 190,000 migrants coming into Australia, there’s a shortage of housing, and people need accommodation.”

Some industry names say now is a ‘‘once-in-a-generation opportunity” for investors.

“It’s probably a good time to buy in the right spot, but be careful,”.

PD

Yes, I know the title to this post may seem like an oxymoron. I read an article recently stating that 2% of businesses have been bankrupted by the Tax Office because of overdue tax bills. This shouldn’t be the case!

I see it alot with small businesses owing money to the tax department. Some thousands, some hundreds of thousands, and it gets me thinking sometimes, Why? I realise that cashflow is the all important thing that small business struggles with. I experience it myself, but I have the necessary strategies in place that enable me not to lose sleep over it. I have to admit it has taken a few hard lessons and seeing others learn them aswell, to actually put something in place.

If you have the capacity to borrow money to fund cashflow, such as factor finance and business loans, you need to make Tax payments part of the budget! Superannuation is another one you need to budget for incidentally.

It surprises me that so many business owners don’t put money aside for tax payment at the end of the quarter, or year when they come knocking.

Over the last few years, I’ve started two High Interest Savings accounts specifically for my tax payments. I use all the time available to me to pay the Tax Office. Don’t get me wrong, I dislike the ATO as much as anyone. The longer they can keep their grubby little hands off my money, the better.

This way, I get to earn as much interest as possible on the tax money I owe. And at the time they need the funds for payroll tax, GST, Capital gains, income tax, and whatever other tax they overzealous tax chiefs in the government can muster up, I actually have the funds to pay them!

This keeps them off my back and out of my business where they belong. You don’t need to be worrying about the Tax Office when running a business. you need to be concentrating on generating income and growing your asset!

All you need is a small amount, Eg; $1,000 for the first deposit. Then work out what your approximate tax was last year and reduce it to monthly amounts to be paid into the account by bPay or direct debit. I do it automatic transfer online each month. That way, I have all the control.

Apart from using it for the tax man, it can be used for many things such as a planned holiday, emergency fund, or just teaching your kids how to save. Set yourself a target, and then move some out into a more strategised investment such as shares or property investment.

Whatever ther reason, Australians need to start saving again, so the next time we have a recession, you will be in a much better position to take it on.

PD

Yesterday, I covered off how to actually pick a planner. Hopefully, when looking around, you will be lucky enough to find one local in your area. This post today is to cover off who you shouldn’t pick as a planner.

There are thousands of planners and advisers in the market today. The industry itself has a bad reputation for some reason, but I think it’s unfairly earned. Many years ago, the industry had many rogue traders, but were since traded out by the government through strict licensing regimes called Policy Statement 146 (PS146). This requires anyone advising on money and insurance to have the appropriate diplomas called ‘Diploma of Financial Planning’ which takes much study and complex tests to complete.

There are expetions to the rule in many cases, and I believe there is one when talking about this area. Banks! Yes, they are a bunch of Bankers.

Banks have been immune to many of the rules and regulations set on the financial services industry that has kept it clean for the past few years.

One of the rules is that ‘independent’ advisers MUST offer independent advice to clients from several financial institutions, making it unbiased of course. Bank employees are influenced by the banks products, limiting their choice in advice to you.

When choosing a planner, make sure you look into their product offering, which can be obtained by asking them for their Financial Services Guide (FSG), and that will give you an idea of what they can offer.

If you are in a small town and the only planner available is bank staff, then you may want to also ring another town or city and discuss over the phone so you can compare.

No more than 3 planners will be enough for you to get a feel of what is acceptable. And above all else, make sure you feel comfortable with the person, but remember, they are qualified and if you take their advice, FOLLOW IT. They don’t say it for nothing.
Good luck. I would love to hear any stories from you about success stories of visiting a financial planner. If you haven’t visited one and would like contact to one, please Contact Me and I will give you a list of some you can interview.
PD

What makes interest rates go up and down?

Interest rates, as we all know, are what determines the cost of our mortgages, loans and sometimes, credit cards. But what makes them go up and down? What is the determining factors that make those grey haired men in corporate government palaces change the amount I pay on my mortgage each month?

I’ll try to help you easily understand why this happens in this post.

The Federal Reserve can manipulate interest rates by buying
and selling bonds in the bond markets. During economic times the Fed wants to
stimulate the market, the Fed buys bonds on the open market, and pays for the
bonds with cash. If the Fed continues buy bonds, the market becomes flooded with
cash. This excess cash in turn makes money more available for people who want to
borrow. The result is interest rates will naturally come down as different
lenders compete for a limited pool of borrowers.

The interest rate to borrow this excess money begins a bidding battle between different lenders each competing for the loan funds (so they can then lend to borrowers like you and me). Just like the most of us, borrowers go for the lowest price.

Interest Rates and A Growing Economy

When the economy is growing, consumers gain confidence, as their confidence
grows people start spending money. What do they buy? Everything under the sun
but consumer goods are the term you will hear most often. People buy items like
cars, computers, appliances like stainless steel refrigerators, etc.

This is the cycle of inflation, which in turn leads to increased interest rates:
1)    As demand for products increase, or more people buy stuff they don’t need, companies can begin to charge more for their products.
2)    When people want more stuff, companies make more money.
3)    As companies begin to make more profits it is not long before workers begin asking for more benefits and more money in their paychecks.
4)    As companies meet worker demands, the company experiences increased cost and expenses
5)    Then inflation begins.

Inflation is the prime cause of interest rate movement. To slow down any inflation, the government (Federal Reserve) starts selling those bonds they were buying before. Considering that the market was awash with cash when they were buying bonds, what do you think happens when they start selling?

That’s right! Money floods OUT of the market, and it makes it harder for lenders to get hold of money, hence the increase in costs to borrow. This then slows down everyone’s mad spending and slows down the economy.

PD

To read more about bonds and how they work, see this post

So, what exactly are bonds?

Companies typically have two ways of raising cash when they need to expand their businesses or need it for a mind-boggling number of needs. One is by going public and diluting their ownership of the company to investors who would all pay a morsel (share price) and claim ownership: stocks. Another way of raising money is the age old method of borrowing: bonds.

Companies can borrow from the investors themselves and when each of the investors lends out even a small amount like $1000 it quickly rolls into a huge sum of money which the company can use for its expansion or other needs. Usually the federal government also borrows money from the investing public (these are the government bonds) for its own use. All of this money is returned to the public in a periodic manner with interest paid on the sum borrowed.

So typically, a bond is nothing but a loan that you hand out to companies or the government itself. The loan is paid back to you (an investor) within a scheduled time and at a specific, pre-determined interest rate (also known as coupon rate). The borrower (the company or the government) would have agreed in writing to pay back the borrowed amount (called as face value, in bond parlance) at a fixed date into the future which is when your bond matures ( the amount would have been paid back to you in full with Interest) and this date is called as the maturity date.

Since you always know how much you are owed exactly, these investment vehicles are less risky, more stable and hence they pay less compared to stocks. They are often called as fixed-income securities or debt-market instruments to reflect on the fact that they are predictable, more stable, pay less but don’t fluctuate wildly.

Between the two important investment vehicles — debt (Bonds) and equity (Stocks), there is this major difference. When you pick stocks, you claim ownership of the company, complete with voting rights and the works - you make money when the company you invested in makes money. When you buy bonds, you become a creditor to the company and in principle, when push comes to shove and when companies have to liquidate for some reason, the creditors are given the first preference and the bond investors are paid up first.

Over the past few years, the example given above has been pushed to the maximum and has caused what we now know as the Global Financial Crises - Link to a great video to show how it happened

PD