Now that you what bonds are, you might be asking yourself how to actually get into the bond market. Let’s take a look at how to buy bonds, where to buy bonds and what to look out for.
Where to buy bonds?
Bonds can be bought either online or with a broker.
Directly from the Fed
In the U.S., you can buy bonds directly from the government through TreasuryDirect. All transactions and interest payments are done electronically. The Bureau of the Public Debt started TreasuryDirect so that people could bypass a broker completely if they wanted to.
Through a BrokerBe careful when using a broker. Typically, the broker will slightly mark up the price and happily tell you that the trade is totally commission free. This mark up will essentially be the same thing. The best thing to do is to simply look up the latest quote for the bond to make sure you’re not being taken advantage of.
Through a Mutual Fund
Buying individual bonds makes sense if you own a lot of them and hold them to maturity. Most people don’t do that, though. Most are better off buying bonds through a mutual fund, if only for diversification’s sake.
How to buy bonds (effectively?)
There are a number of important questions to ask yourself before buying bonds.
What is the maturity of the bond?
What’s the price?
Does it have early redemption features such as a call date?
What is the credit quality?
What is the rating? Is it insured?
What is the interest rate?
What is the tax status?
Bonds are not nearly as liquid as stocks and ETFs, and therefore there is not nearly as much information publicly and freely available. If you are going to buy bonds, always buy them from a reputable source and always check your prices to make sure you are getting a fair price. Also, you must remember that when you buy a bond your return is called the Yield to Maturity and NOT the Coupon Rate. If you buy a bond below $1,000 you will yield MORE THAN the Coupon Rate; and if you buy a bond above $1,000 you will yield LESS THAN the Coupon rate.
All of this information on how to buy bonds can be overwhelming. Although bonds are technically lower risk, it’s still really important that you understand both how and where to buy bonds. Our Investing in Different Markets course covers all of it and more.