Stock Market

Corporations issue bonds and notesboth mortgage {secured debt) and debentures (unsecured debt)but these are not wise investments for individual investors. Why not? Well, since you asked so nicely ...

Corporate debt typically includes call featuresa must to avoid. Some corporations also issue a hybrid security called a convertible debenture. A convertible claims to give you participation in both the bond market and the stock market. Unfortunately, you just get two watered-down products: (1) a coupon that pays less interest income than a plain old bond and (2) a chance to buy the company's stock that doesn't kick in unless the stock price increases at least 20-25 percent. Avoid convertibles and leave the field to the experts who specialize in these securities.

Most corporations have fluctuating credit ratings. You might buy bonds from a company with a triple AAA rating, only to find that a few years later the company has made some bad business decisions and has had its credit rating downgraded to A or even BBB. Yikes, now you have to worry about whether the company will be able to honor its promise to give you back your principal at maturity.

Outstanding corporate debt typically sells in individual units of 100 bonds ($100,000). Do you want to sink that kind of money into one company's bonds? Not unless you have millions to invest, you need your own private financial advisor.

Corporate debt is primarily traded over the counter instead of on the New York Stock Exchange or American Stock Exchange, which are more accessible to individual investors. The NYSE might trade around $10 million in bonds on any given day. Amex only does around $750,000. Meanwhile, roughly $100 million a day in corporate bonds is traded in the over-the-counter market. That's a market that small investors don't really have access to, and those bonds aren't quoted in the newspaper bond tables, either.

TIP: A mortgage bond is a bond backed by actual collateral, either in the form of real estate or property that can be liquidated in the event of default. Mortgage bonds are also known as secured bonds. On the other hand, debentures are bonds backed only by the promise of the company to repay; also known as unsecured bonds.

For all these reasons, corporate bonds are not a good choice for individual investorsmeaning you. The higher yields are not worth the added risk and aggravation. Stick with Treasuries and agencies.