Fixed Income Trading

As the name suggests, fixed income trading involves trading of commodities which have a fixed return associated with them. Such fixed income trading is mostly where the returns or income received from them is at fixed intervals and of a stipulated rate.

Retirees prefer fixed income trading
This type of investments is mostly done by individuals who would like a steady income on their investments. They do not like to take any risks as to the returns they can obtain on their investment. They are afraid of a decrease in the returns in the future rather being optimistic about the rates being increasing. Such stable income is more loved by retired individuals who would like to be assured of a minimum amount per month. These regular fixed periodic returns help the retirees to meet their budgetary expenses. Also, they can maintain their lifestyle since they are assured of the fixed amount. These are the returns stipulated in the contract and hence the investor is assured of that amount regularly during the period of the contract.

Inflation eating into your fixed returns
The downside to this fixed income trading is that the regular fixed returns will be eroded by inflation. Though the amount of money received regularly remains the same, the value associated with that amount may decrease over a period of time due to inflation. The value of money is its purchasing power for goods in the market. For example, if $1000 was sufficient to meet the daily needs of a household of four for a month, then due to rise in inflation the amount required may be more than $1000. Thus, the fixed income though regular and assured does not take this concept of inflation into consideration.

Inflation is inevitable and more so in a developing or a developed economy. The root effect of inflation is that it increases the prices of essential commodities along with those of luxury goods. As the standard of living increases, also the inflation will rise. In economic parlance, the demand exceeds the supply, giving reason for the prices to increase which in turn boosts up inflation. Hence, the money received by fixed income trading last month may not be sufficient to maintain the same lifestyle and similarly, the fixed income received this month may not be sufficient to maintain today’s lifestyle tomorrow.

Be prepared to tighten belt
If you have invested your entire life savings in fixed income trading, then you may have to tighten your belt a few notches every month just to be able to meet ends. You may be in line for a financial problem if the fixed returns which you receive have been just meeting the expenses you have envisaged. Since you will be receiving a set return and there will be no variation in it for a fixed period of time, then when the inflation rises you will be actually receiving less purchasing power every month. When you have opted for a variable rate of returns, this rate may change as per some conditions like the situation of the market and can even give you higher returns then you had received initially. The returns may increase due to the rise in inflation and your need for an extra amount of money to meet your budget may be taken care of by this increase.

Example of fixed income trading  
A classic example of fixed income trading would be the federal government bonds. Let us assume that these bonds have assured a rate of return of 6% over a period of five years. You invest $100,000 in such bonds. You are assured of an annual return of $6000. So throughout the five year period, you will receive $6000 per year no matter what the market rate for variable investment is. You have to take into cognizance that this fixed income trading will offer you a lower rate of return than that prevailing in the market at that moment. If you are lucky, the rate offered to you might turn out to be higher than the market rate at the end of your fixed term of investment. Since the market rate fluctuates, it may so happen that there is a downslide in this rate which may make your fixed rate a rate to envy. Investing in fixed income trading gives you opportunities to get a sustained fixed rate of return around which you can fashion your lifestyle.

Comments are closed.