Stocks, Bonds, and Interest Rates

     I should have posted this a long time ago. I want  to explain what a stock is and how it is different from a bond and how interest rates affect both. First, a share of stock is actually ownership in a company. If you have one share of Intel, you own the company along with 6.8 billion other shares. Your percentage of ownership is so small, I don't even have a calculator to figure it, but that dosen't mean you won't make money by holding the stock. In contrast, owning a bond issued by Intel, is simply you making a loan to the company for a predetermined amount of interest paid to you. Which investment is better? The answer is dependent on many factors including your investment objectives. Regular readers of this blog know that I am not recommending the purchase of bonds at this time. The reason is that in a period of increasing interest rates, the principle of your bond investment WILL decrease in value if you sell it before maturity. Just like stocks, bonds offer investors the opportunity to lose their investment dollars. FYI, the total value of the U.S. bond market is about 40 trillion dollars, in contrast, the total value of the U.S. stock market is just 20 trillion dollars give or take a trillion or two. So the bond market is twice as big as the stock market. On a daily basis, bonds trade about 700 billion dollars a day while stocks only trade about 200 billion dollars. Bonds come in all shapes,sizes, and flavors: Muni bonds-issued by states, cities and counties (these are free from federal taxation), corporate bonds-issued by companies to raise money for operations, government bonds-issued by Uncle Sam to finance the huge budget deficit, and individual agencies of the U.S. government to finance operations. There are too many details of each type for this forum, but I would be glad to answer any questions on any if I can. There is a time for stocks and a time for bonds, and a time for safe investments that avoid them both. I still like stocks at this point for reasons explained in previous posts. Bonds had a long and profitable run for about 20 years but that ended after the financial crisis in 2008. I want to hold bonds during a period of DECREASING interest rates which we are not in now. Therefore, I have sold most of my bonds except the ones that I plan to hold to maturity. I have also sold any mutual funds that are "balanced" because they have a bond component which could cause losses in the future. As for interest rates, I only keep a close eye on the 10 year treasury, it is currently at 2.74%. The stock market is getting jittery because this rate is increasing rapidly. In my opinion, the 3% range will spell trouble for stocks because it makes fixed income investments like CD's attractive to investors. That's why I own both CD's and stocks. I sleep better knowing I have deposits in the local Credit Union that are safe and sound and also have stocks that can benefit from Trump's tax cuts to corporations.