What are bonds, and for what type of investor are they most suitable? I am looking for something less risky than the stock market but want more interest than I can get in a standard high street savings account if possible.
There is often a great deal of confusion when it comes to the term 'bonds'. The word bond can mean different things to different people. A common use of the word bond is to describe the fixed interest securities asset class. This asset class includes Gilts and Corporate Bonds. Gilts are debt issued by the UK Government. Corporate Bonds are debt issued by companies. These tend to be less volatile than investments in shares (equities) but even though the interest is fixed, they can fall in value. Gilts tend to be more stable than Corporate Bonds, but they pay a lower return to reflect this stability. Corporate Bonds can vary in risk, all the way from debt issued by financially strong companies to 'junk bonds' issued by companies with a high credit risk.
Like any investment type, fixed interest securities should make up a proportion of your overall investment portfolio. The general rule of thumb is to match the percentage of holding to your age. For example, a 40 year old investor might consider putting 40% of their portfolio into Gilts and Corporate Bonds. The actual level you should invest will depend on the level of risk you want to take, the term of your investment and your view of interest rates and inflation.
(Information is intended for guidance only and is offered without any legal responsibility. None of the information provided constitutes any form of recommendation and is not intended to be relied upon by you in making any investment decision. You should always obtain independent professional financial advice before making any investment decisions).