Trading bonds can seem a bit difficult compare to stocks, because there's no central exchange for trading bonds. Still, once you learn what you're doing, trading bonds becomes a lot easier.
To start, you need a brokerage account. It's your choice whether you go with a full-service broker or an online trading account. Possibly your own level of experience may help you to make that choice. Make sure you understand what the account requires you to do in order to place an order. You don't want to find yourself needing to place an order but unable to do so because you're traveling and don't have internet access, as an example.
Bonds have a purchase price, a sale price, and also an interest rate. If you purchase one, you (as the bondholder) are entitled to payment of the principal when the bond matures, as well as interest payments twice a year.
In the same way as stocks, the prices of bonds vary. When a bond is first issue, its initial price and interest rate are set. From then on, the market dictates what they're worth, and whether it's higher or lower than it was when issued. General market interest rates have a major impact on the movement of bond prices. If the interest rates on bank loans, real estate mortgages, and savings accounts drop after the issue of the bond, then the bond's price will tend to rise.
This isn't had to understand. If you're holding a bond that was issued that pays at an interest rate of 7%, and cash deposits drop to a return of 6%, then naturally your bond will be worth more and its price will rise. Basically, your bond pays more in interest than a competing investment. As to how much they're likely to rise, well, that's a lot more complex, and certainly outside the scope of this article.
A common expression in bonds trading is 'over 100', which means that a bond is trading at a premium to its issue price, and bonds that are 'under 10' are trading at a discount. The 100 refers to 100%, where 100% is the initial price.
Like all investments, bonds have a risk factor. If a company goes bankrupt, bondholders do take priority over shareholders when it comes to paying out creditors, but if there's no money available anyway, your place in the queue is basically irrelevant. A lot of bonds are fairly low risk, as generally it's expected that you'd at least receive your money back in a crisis, but the lower the risk, generally the lower the return on the bonds.
To help you assess which bonds are best for you, it's worth taking a look at the bonds ratings issued by Standard and Poor (S&P) or Moody. These companies analyze bonds using very complex, technical formulas, in order to produce a simple sliding scale valuation of bonds. You can go from the very low risk or AAA rated bonds, right through to the CCC bonds, which are very high risk and are often referred to as junk bonds.
Make sure you do your homework before buying bonds - check out the company, including earnings projections, possible legal issues, levels of debt and so on. Basically, you're going to be granting that company a loan, and like all lenders, you want to feel confident that the interest will be paid on time, and that the company will be able to repay the loan in full at the agreed time.
Timothy Gorman is a successful Webmaster and publisher of Online Stock Trading Secrets. He provides more stock advice, information and ways to make money with bonds that you can research in your pajamas on his website.
