What is “fixed income investing”?
Hi I’m David Luhman and welcome to “Bond and Fixed Income Investing for Everyone”. In this tape I’ll introduce you to some of the important points of investing in bonds and other types of fixed income instruments.
First, if you’re like me, you may be wondering where the phrase “fixed income” came from. Why not call this tape “Bond Investing for Everyone”? Well, that would be easier, but it would limit the scope of the tape.
Bonds are just one form of fixed income investment. Other forms are bank deposits, fixed annuities, preferred stock, and money market mutual funds. They all have their own characteristics, but they all can be called fixed income investments. In fact, most investment securities can be broken into either fixed income investments, like bonds, or equity investments, like stocks.
Fixed income investments vs. equities
With a fixed income investment, you’re making a contract with someone. The contract says that you loan your money to the borrower, and the borrower promises to return your principal with interest. You have no further upside, but the terms of the contract try to limit your downside.
These contracts make certain or fix the amount of interest you’ll receive. On the other hand, there’s nothing fixed about equity investments. Here you invest some money and hope you’ll get a lot more money back.
If things go well with an equity investment like stock, there’s no limit to your upside potential. If things go poorly, you’ll probably lose everything.
With this distinction in mind, let’s take a look at some of the fixed income investments you’ve probably already made.
You almost certainly have at least one fixed income investment — your bank account. Still, you’d be surprised to hear that a good portion of the population doesn’t even have a bank account!
But banks are so prevalent that they probably don’t need much of an explanation.
They’re simple. You deposit your money, and they pay you interest. There’s none of the complications associated with capital gains or losses, so paying taxes on your interest is straight forward.
And thanks to federal disclosure laws, shopping around for the best bank is easy. For certificates of deposit, just look for the bank paying the best interest. Almost all banks are covered by the same Federal Deposit Insurance Corporation, so you don’t have to worry about the bank’s stability, as long as your deposit is under $100,000.
If you’re looking for a checking or other cash management account, things are a little more difficult. Banks are earning more and more money off the fees they charge their customers, so you need to shop around for a bank that will give you the best deal on interest income, low fees and convenience.
Copyright 1997 by David Luhman