Last Updated on July 24, 2022 by The MediFi Guy
So what exactly is investing? For our purposes, to invest refers to the act of buying one of the following things:
1) Stocks, also known as Shares or Equities (all synonymous)
2) Bonds
3) Cash
4) Property
The proper term for the aforementioned things is “asset classes“
Bonds
A Bond refers to money that you lend to either a private business or the government.
President John Doe wants to introduce a new social program to improve the lives of citizens. He realizes that the government does not have enough money to institute the program so he needs to find an alternate source of money to fund it.
The money needed to fund the program is R100, so President John finds a piece of paper on which he writes the following: “Lend me R100 now, and I will pay you R5 interest every year for 10 years, at the end of which time I will pay you back the principle R100 you borrowed me – resulting in you receiving a total amount of R150 during that period of 10 years”.
He takes the piece of paper to the stock exchange. He calls that piece of paper a bond certificate. He puts it up or rather issues it for sale on the stock exchange.
Peter, in search of a low-risk investment with a set rate of return, notices that the President has issued a R100 bond with a yield of R5 per annum which matures in 10 years. This just happens to be the exact amount of time in the future that Peter will need R150 to buy a new gadget set to be released in 10 years’ time, so he purchases the bond and receives the bond certificate.
Side note: Replace the government with a business in the above example and the same idea applies to commercial (i.e. private) bonds.
As you can see, bonds are lower-risk investments as they have a guaranteed set interest rate (backed by the government in the case of government bonds), but as a result, offer a low to medium rate of return.
Bonds generally come in the form of short-term (5 years), medium-term (10 years), and long-term (15 years or more) bonds. The longer the term, the higher the interest rate tends to be.
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