How to buy Bonds? An investor must acquire knowledge about this before investing in bonds.
You may not know what a bond is and how it works but you cannot invest in a bond if you do not know how to purchase a bond. The procedure for purchasing government bonds, corporate bonds or municipal bonds is almost the same. However, the context of the purchase is different. Investing in a bond will be more profitable if you have a solid idea of what to consider before buying a bond.
So let’s learn how to buy bonds.
How to Buy Bonds
You can use different means to purchase bonds. For example, you can buy through a broker or an exchange-traded fund. You can also purchase directly from the government’s treasury department.
Buy bonds from broker
You can buy any bonds, including treasury bonds, corporate bonds or municipal bonds, through brokers. It is very easy to buy bonds from a broker. Just having an account is enough. You can make transactions through that account.
You have to pay a certain amount of commission as fee for transacting through broker account.
Buy bonds from Government
If you want to buy government bonds, you can buy directly from the government treasury department. If you are a US citizen, you can purchase Treasury Bonds through the Treasury Direct website. You must be 18 or older to purchase Treasury bonds. It is required to submit some documents to open an account, such as a valid Social Security Number, bank account and address. Government does not charge for buying bonds.
Buy bond through an Exchange-Traded Fund (ETF)
Exchange-Traded Fund (ETF) is another way to buy a bond. If you are planning to invest in bond you can buy bond exchange traded funds (ETFs).
The Exchange-Traded Fund (ETF) buys bonds from a variety of companies and follows certain investment strategies. Since ETFs are a combination of many bonds, so it provides investment diversification. If you want to invest a little amount then you can invest in bond ETF. The amount of management fee is less than that of a mutual fund. All you have to do is pay the NAV cost of the ETF. Since the amount of fees is low, investors can earn relatively more.
The investors who want to hold their bonds for a long time, a bond ETF can be a good option. Since there is no short-term redemption fee, active investors may prefer bond ETFs.
How do you buy bonds from the secondary market?
The market in which previously issued securities are traded is called the secondary market. An investor can purchase bonds directly from an underwriting company. They can also buy bonds from the secondary market.
Investors can buy all types of bonds from the secondary market. Investors are able to buy these bonds from brokerages or public exchanges. When new bonds are issued, all investors pay the same face value. But in secondary market the price of corporate and municipal bonds may be higher than newly issued bonds.
Different dealers offer different price. When you go to buy bonds, various types of fees may be levied on bond related transactions.
What factors should you consider before buying a corporate bond?
When a company issues bonds in the market to raise funds, it is called corporate bonds. The interest rate on corporate bonds is higher than that on government bonds.
The credit rating of the company must be checked before buying corporate bonds. If the credit rating of the company is good, it can be considered as investment-grade bond. Buying bonds from that company is much safer.
But those bonds are risky if the credit rating of the company is bad. You must consider the maturity of the bond (short, medium or long-term). Because shorter maturity bond offer lower interest rate and longer maturity bond offer higher interest rate. You need to know whether the interest rate is fixed or variable.
If there is call provision in the bond, it is not profitable for the investor. It is better not to invest there. If there is a Put Provision then it is convenient for the investor.
What factors should you consider before buying a government bond?
Government bonds are issued from the treasury branch of the government. The interest rate on these bonds is lower than that on corporate bonds. However, the government can never go bankrupt, so buying government bonds is much safer than buying corporate bonds.
Since the amount of revenue in government bonds is less, you have to consider it before buying this bond. If you want to make more money with more risk, buy corporate bonds instead of government bonds. And if you want to earn less by investing less risk, then you can invest in government bonds.
What factors should you consider before buying Municipal bonds?
When a bond is issued by the state and local government, it is called a municipal bond. Municipal bonds are also considered a safe investment. Even then there may be some risks. So before you invest in Municipal bonds, you can search the Electronic Municipal Market Access (EMMA) website. Here you will find all kinds of information about bonds like bond’s official prospectus, their audit report, ongoing financial disclosures etc. You will also need to consider the quantity, coupon and maturity date of the bonds when purchasing municipal bonds.
When should you buy bonds?
The best time to buy a bond is when the interest on the bond is at its utmost level. In addition, the face value of the bond will be relatively low so that if the value of the bond continues to soar, it can be sold and profited.
You need to consider whether you have enough money. Because when you invest in bonds, your capital will be stuck for a certain period of time. So decide to buy a bond only when you have enough money.
Bond Investment tips
- You must do some research before buying a bond. If you are going to buy a bond then you need to get an idea of how the bond works. When buying corporate bonds, you need to know whether the credit rating of that company is good or bad. If you buy a company’s bond that has good credit rating, you are sure to get a return.
- You need to know the maturity of the bond you are going to buy. If you buy short-term bonds, the interest rate will be lower. And if you buy long-term bonds, the rate of interest will be higher. But if you buy long term bonds, your capital will be stuck for a long time. You may suffer from a liquidity crisis. So after doing good research in this regard, then take decision.
- Bond interest rates can be fixed or floating. Fixed interest may better for you. Because you will get payment at the same interest rate till maturity. But if there is a variable interest rate, it may go down in the future.
- It is better to avoid call provision. This is because the issuer can call the bond when the price of the bond soars in the market. You will then be deprived of the profits you would have made as a result of the increase in the value of the bond.
- It would be better for you to stay away from junk bonds. junk bonds offer high yields but companies that do not have good credit ratings usually issue such type of bonds. So buying these bonds is very risky.
- When buying a bond, give an eye on the fee or commission related to the transaction of that bond. It’s a part of your investment. Do not forget the fee or commission by looking at the price and yield of the bonds. Because the unreasonable fee or commission can eat up a portion of your return.