Income - According to the Wizard
Dividend Income (straight preferreds): You may prefer them to common
A preferred stock is just what the name states. It has features that take preference over the common. I like preferred shares. Some advisors believe that preferred shares benefit corporations more than investors but I don't agree. I think there is a time and place for them in the portfolios of a great many more investors than who actually do hold them. Typically, a preferred share offers preference on all income available after the payment of bond interest and amortization but before dividend payments on the common stock, so as an equity it is very different than common...
Dividend Income (convertibles): About CV preferred stock
Convertible securities (CVs) represent income plus potential appreciation. They can be in the form of preferreds or debentures. CV preferred stocks are similar but not as secure as CV debentures for they are not as likely to be paid off in case of corporate liquidation. As the name implies, CVs can be converted into shares of the related common stock at specified ratios, usually until a specified date, but occasionally indefinitely. CV preferreds have four main features/benefits: (1) Income and growth, (2) Tax advantage, (3) Continuity, and (4) Lower price than bonds...
Dividend Income (convertibles): About CV bonds
Convertible bonds are more complex than CV preferreds or straight bonds. Investors need to understand them before buying any. What CV bonds are is a conservative way to play the equity market and an aggressive way to play the fixed-income market. CV bonds, called debentures if there is no asset backing, represent a debt of the issuing company. Over the years, a couple of my professional colleagues have heavily promoted the pro's of CV bonds to their clients. However, despite what some brokers and advisors may tell you, CVs are no sure road to financial success...
Interest Income (bonds & cash): About the yield curve
Many investors think bond rates move up and down together. Everybody should know rates of different maturities behave independently. In fact, short-term and long-term rates even move in the opposite direction occasionally. At any given time, the yield curve is a line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. What's key is the pattern of interest-rate movement -- and what it says about the future of the economy and the capital markets. It is a tool for economists but also one you should use...
Interest Income (bonds & cash): About corporate bonds
Corporate bonds are debt to a corporation. When you buy a bond, you are loaning them money. In return, you receive a certificate that states the corporation will pay interest at a specified rate, usually twice a year, until paying off the debt from 5 to 40 years in the future. Corporate bonds might be safe but they are not as safe as the government bonds of the major countries. Just a couple months after Enron Corp was reputed to be one of the world's strongest, it was bankrupt. In recent years, corporate bond values have fluctuated as much, or more than, those of stocks...
How to figure bond yields
Figuring yields and trading bonds is pretty simple when you get the hang of it. The interest rate is the most important factor in the price of bonds, not supply and demand as with common stocks. Bond values rise when interest rates decline. Conversely, bond values fall when interest rates go up. Yields on short-term issues tend to fluctuate more than those on equal-quality, longer-term bonds. Short-term yields react more quickly to business cycles and monetary changes, and move to greater extremes in both directions. Shrewd traders take advantage of this differential...
Trading bonds for capital gain
It is foolish to stick to the myth that bonds are a secure investment that provide a fixed annual income and are to be redeemed at maturity for the same amount of dollars used to buy them when issued. Bonds are investment instruments you should trade like a stock. A bond reflects the cost of money, the interest rate. Capital gain opportunities result from changes in rates. Nowadays, with the extreme volatility in rates, bonds should be bought for trading, not holding, unless you are willing to swap the ultimate security for interim paper losses or actual profits...
Trading bonds on the NYSE
The NYSE operates the largest centralized bond market of any U.S. exchange. It offers investors a broad selection of over 2,000 corporate (including convertibles), agency and government bonds and even foreign bonds. The large preponderance of NYSE bond volume is in corporate debt, with some 85% in straight, or non-convertible bonds, and 15% in convertible debt issues. Closing bond prices are available in the financial sections of major newspapers, as well as on-line. For trading bonds, investors will find all the information they need at the NYSE web site...
