Investors can buy bonds from brokers, banks, or directly from certain issuers.
You can buy newly issued corporate, municipal, and agency bonds, or bonds trading in the secondary market through your broker or from certain banks. In the secondary market, you buy bonds that are being sold at some point after issue by a previous investor.
You can also buy US Treasury issues through these intermediaries or you can buy them directly in a regularly scheduled Treasury auction with no middleman and no commission.
How does Bond trading work?
Most already-issued bonds are traded over-the-counter (OTC), a term that really means over the phone or by computer. Bond dealers across the country are connected via electronic display terminals that give them the latest information on prices. A broker buying a bond tries to find the dealer who is offering the best price and calls to negotiate a trade.
Brokerage firms also have inventories of bonds to sell to clients looking for bonds of particular maturities or yields. Often, investors make out better buying bonds their brokers already own — or make a market in — as opposed to bonds the brokers have to buy from another firm.
The Bureau of the Fiscal Service handles transactions in new Treasury issues. To buy, you establish a TreasuryDirect account, which keeps electronic records of your transactions and pays interest directly into your bank account. You can find the forms you need on the TreasuryDirect website to enroll online. You can sell your Treasury securities before maturity, but, if they’re in a TreasuryDirect account, you must move them to a brokerage account. With small balances or relatively short times to maturity, this may not make financial sense.
What Bonds to buy?
High minimum investment requirements can make it hard for individuals to invest in most bonds. Even though par value is usually $1,000, bonds are often sold in minimum lots of five or more and may require an investment of at least $10,000. US Treasurys are the exception, since you can purchase just one bill, note, or bond at a time if you wish. As a result, institutional investors, such as banks or mutual funds, hold the majority of individual bonds, corporate bonds in particular. Many high net worth individual investors hold substantial numbers of munis.
An alternative is buying bonds through an actively managed account, or portfolio of individual bonds chosen and overseen by a professional investment manager. You’re just one of the hundreds of investors whose accounts are overseen by the same manager. But while all the accounts will include many of the same bonds, you can customize your individual account to some extent in collaboration with your investment adviser and the professional manager.
Other investors may choose bond funds, rather than bonds. A bond fund makes it easier to diversify a fixed-income portfolio and allows you to reinvest your earnings to buy more shares. But funds don’t promise return of principal at a set maturity date or pay a fixed interest rate. In fact, in one sense, buying a bond fund is actually making an equity investment in debt securities, as you own shares of the fund that owns bonds.
All You Need To Know About Buying And Selling Bonds by Inna Rosputnia
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