Quick Guide on Buying a Bond – Tips on How to Buy a Bond
Bonds provide investors with a stable product with relatively predictable returns.
For the beginning investor looking to build a long-term portfolio, learning how to buy bonds is an important lesson.
One of the general bond buying guidelines followed by most investors is to invest more heavily in bonds as you get closer to retirement.
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Using this strategy to buy a bond is more productive than buying a bond at your younger age due to the following key reasons:
• Bonds are stable compared to many other investments. This protects your principle when you need it most – at retirement.
• Earlier in life when you have a higher risk tolerance, the stock market typically outperforms the bond market by several percentage points.
However, a balanced portfolio can certainly include bonds at any age.
How to Buy a Bond From Discount Brokerages
The age of the Internet has given birth to the age of discount brokerages.
These self-directed brokerage accounts allow anyone to open an account and purchase financial products, such as stocks and bonds, with only minimal fees and commissions charged by the brokerage.
If you’re looking into buying a bond of any type, these brokerages will have the means for you to do so.
Different online brokerages will have access to different types of bonds for you to choose from.
You can spend some time shopping around the different brokerage companies to find the ones with the largest bond offerings if buying a bond is your top priority in opening an account.
For example:
• Scottrade does business with more than 300 bond broker-dealers.
• TD Ameritrade has a Bond Education Center to educate you about investing in bonds.
• Fidelity offers more than 40,000 bonds.
• E*Trade has more than 50,000 bonds to choose from.
Also, these brokerage firms provide a wide range of bond buying tools that make it as easy as possible for customers to invest. They also have some great educational resources for someone searching on how to buy bonds for the first time.
These tools could help you select the perfect bond for an initial investment.
Buying Government Bonds Straight From the Source
If you want to buy U.S. Treasury bonds, you don’t need to worry about opening brokerage accounts or dealing with your bank. Instead, go straight to the source.
The US government operates a website and service called Treasury Direct. If you open an account with them, you can buy U.S. government bonds directly from the government, cutting out any middleman.
Buy Bonds From an Underwriter
Bonds that don’t come from the government come from underwriters.
When buying a bond, it pays to purchase from the underwriter who is backing a particular bond.
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The price will be more affordable than the one you will pay through a brokerage. Again, this is essentially a means of cutting out a middleman who will only charge you extra fees and commissions.
The biggest banks are the bond underwriters. Some of the companies active in this field include:
• JPMorgan Chase
• Citigroup
• Bank of America Merrill Lynch
• Barclays
Buying Bonds From Bond Funds
If you’re dead set on buying a bond but don’t have a large sum of money, then you should consider bond mutual funds or ETFs.
The purchase price of even small bonds tends to start at $1000 or more. Therefore, it is difficult to diversify your purchases unless you have tens of thousands to invest.
You can invest in a bond fund for less than the purchase price of many individual bonds, however, making them a much more accessible entry point.
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Beware of Inflation
When learning how to buy bonds, it is essential that you take inflation into consideration. Locking yourself into a long-term bond requires careful financial planning. This is because you need to make sure that the return you’ll make on your investment is enough to justify the reduction in relative value of your principle caused by inflation over the duration of the bond.
The associated fees also need to figure into the equation regarding your total profit.
In short, make sure that your bond investment will be profitable before you make it. Seeking the help of a professional advisor can be helpful in this regard.
Use Your Bank’s Resources When Buying a Bond
Many people are so taken with the modern idea of discount brokerages that they overlook one of the old-fashioned ways of buying bonds.
When considering how to buy bonds, don’t forget about your bank. Many banks offer services where they can help you with buying a bond. This is a good idea for beginning investors for a few reasons:
• It keeps your business with an organization that you already have an existing relationship with.
• Bank employees can walk you through the process of how to buy bonds so you understand your options.
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