Bonds are a way for companies or the government to raise money by borrowing it from the public. Buying bonds is attractive to investors who want to earn steady, predictable, and relatively stable biannual interest. This guide tells you how you can buy bonds.
Start Trading in 3 easy steps
1. Open a Brokerage Account
The first step is to open a brokerage account that allows you to buy bonds. It typically takes minutes to fill out a broker’s online application form but fully activating your account can take longer if the broker requires you to prove your identity (e.g., by uploading a copy of your passport).
2. Find the Bonds to Buy
Some brokers let you buy an extensive range of corporate and government bonds, some limit the list to government bonds, and some don’t offer bonds at all. Some stockbroker platforms let you filter the list of available bonds by interest rate, issuer, or other criteria.
3. Buy the Bond(s)
Buying bonds is not that different from buying other assets. Regular stockbrokers will ask you for the quantity of bonds to buy or the amount of money you wish to invest; leveraged CFD or spread betting brokers will ask you to specify your stake per unit of price movement up or down.
What Are Bonds?
Bonds, which are commonly referred to as fixed-income securities, are one of the main asset classes alongside stocks (equities). Companies, governments, and other entities issue bonds to investors when they need to raise money for new projects, to maintain ongoing operations, or to refinance existing debts. UK government bonds are referred to as Gilts.
How Do Bonds Work?
The details of the bond include the interest (coupon) that will be paid to bondholders and the maturity date on which the bond’s principal (your invested money) will be paid back.
Each bond is usually priced at a face value of $100 or $1000, and this is the amount you will get back per bond at maturity in addition to the interest you earn along the way. The market price of the bond will vary from the face value during its lifetime according to how attractive it is to investors as a relatively safe source of fixed interest payments relative to the prevailing interest rate or the returns they could expect to get by investing in stock markets at greater risk. If the price of the bond rises above its face value, the investor is free to sell at any time for a profit before the maturity date.
Types of Bonds
There are various types of bonds: Treasury Securities (issued by the US government), Municipal Bonds (issued by state and local authorities), Corporate Bonds (issued by companies), and Zero Coupon Bonds (which can be issued by the government, local authorities, or companies). Although zero coupon bonds don’t pay interest, they are issued at a discount to their face value.
The UK government equivalents of US Treasury Securities are called Gilt-edged securities (Gilts).
Should You Invest in Bonds?
The main benefits of buying bonds are:
- Safety, because bond values tend to fluctuate less than stocks, and you are guaranteed to get back the face value at maturity as long as the issuer doesn’t go bust, which is most unlikely in the case of government bonds.
- Income, because they provide predictable fixed interest payments.
- Diversification, because it’s almost always a good idea not to invest all your money in a single asset class such as stocks.
The main drawbacks to bonds are that they can tie up your money for a long time, you could get stuck with an unattractive rate of return if interest rates rise, a non-government issuer (of corporate bonds) could go bust, and bonds have been less lucrative than stocks historically.
If you’ve already made a lot of money and you’re approaching retirement, bonds could be considered a relatively safe place to park your money.
Pros and Cons of Investing in Bonds
Where to Start Trading Bonds?
New bonds are created and sold at face value in the “primary market” before being traded during their lifetimes in the “secondary market”. As a retail trader, you will almost certainly buy bonds in the secondary market via a broker. To help you find the best broker for buying bonds, we have a few suggestions.
Expert Tip for Buying Bonds“ Since bonds pay a fixed rate of interest, their value falls when interest rates rise and rises when interest rates fall. Therefore, it’s best to buy bonds if you think interest rates will go down during the life of the bond. ”- Shams Ul Zoha
Top Bonds to Invest In Right Now
Since interest rates have been at historic lows for some years, and the only way is up, 2021 might not be the best time to buy bonds except for the relative safety — for conservative investors — compared with stocks. When reviewing our list of suggested bonds below, the rationales for each may be more important than the bonds themselves, because these rationales should help you make your own choices.
UK(GOVT OF) 0.5% SNR 22/07/2022 GBP1000
This is an example of a short-dated bond (so you’re not tied in for too long) with an at-the-time-of-writing price of 100.51 (so you’re not paying much of a premium over the face value). Although the redemption yield — the amount of interest you’ll actually have received by maturity — is only 0.05%, this UK government bond (Gilt) provides a place to park your money for a year with practically zero risk.
PROVIDENT FINANCIAL PLC 5.125% NTS 09/10/23
This is an example of a corporate bond that has a high yield. Since it’s trading at a discount to the face value (96.03 vs. 100) at the time of writing, the “yield to maturity” amount that you’ll get back in total is 8.66% rather than the advertised 5.125%. Although a higher yield means higher risk, the issuer only has to stay in business for two years until maturity.
Just as you can invest in a basket of stocks via an exchange-traded fund, so you can invest in a basket of bonds via a Bond ETF. ETF originators such as iShares provided various ETFs that invest in corporate or US government bonds, and you can buy these ETFs through many brokers.
As relatively safe investments, bonds — and especially government bonds — can be a suitable investment if you think that interest rates will fall or you simply need somewhere to park your money pre-retirement if you’re concerned that stock markets could be due a correction.
You can buy government bonds, corporate bonds, and bond ETFs via an online broker.
Frequently Asked Questions
Government bonds such as UK Gilts and US Treasuries are about the safest investments you can make because governments rarely if ever go bust. Corporate bonds are riskier because companies can go bust, but buying a company’s bonds isn’t as risky as buying its shares.
Not all brokers let you buy bonds. However, the ones that don’t might let you invest indirectly in bonds by buying a Bond ETF.
In simple terms, the coupon is the interest paid by the bond.
The coupon rate is the fixed amount of interest you’ll earn while you hold the bond, and it’s relative to the bond’s face value. If you buy a bond at less than the face value, you’ll make a profit when the broker buys it back at face value at maturity, so your redemption yield will be higher because it includes that profit plus the regular coupon payments.
Since bonds increase in value when interest rates go down, 2021 might not be the best time to buy bonds if you think that interest rates can only go up in the coming years. However, fixed interest bonds could be a good “safe haven” place to park your money if you think that stock markets could crash soon.
Gilt-edged securities (Gilts) are bonds issued by the UK government. They are similar to US Treasury bonds.