Behind every investment is a company (or government in the case of bonds) that has bills to pay. A well run company keeps those expenses in check and paid on time. It even carries an acceptable amount of debt too. But what happens to your investment when that company takes on too much debt? Or it can’t pay its bills anymore? A default risk premium is built into the price of every investment to cover this risk.
Default risk or credit risk is just one more obstacle investors must consider. Banks do it when you take out a loan. Credit card companies do it when you apply for a new card. As an investor, you need to consider it too. If a company can’t pay its bills, it won’t be in business long enough for you to make money.
What Is Default Risk?
Default risk is the chance that a company or person won’t be able to make payments on their debt obligations. Both the company and the lender are exposed to this risk.
Lenders will charge a higher interest rate to companies with a higher risk of default. Which raises the cost of borrowing for the company. This premium must be built in to make the investment worth the added risk to the lender. Continue Reading…
The Fed announcement of QE3 was the big news last week. Despite my misgivings and distaste for more easing, it’s here, it’s going to happen, so let’s make some money from it. Or more importantly, not lose any.
If you had the choice between paying full price, over paying or getting a discount, which you would choose? A sane person would take the discount. The shopping habit of actively searching for deals, bargain hunting is the basic idea behind a value investing strategy. Seriously, who doesn’t like a discount?
Learning how to invest isn’t complicated. It starts with a common sense guide to good financial habits. If you follow these steps, you’ll not only learn how to invest in your 20s, you’ll build the groundwork for successful investing habits over your lifetime. These rules apply whether you’re 25 or 75 and will lead you to save, invest, and grow your wealth.