When you invest in a company, government, or a country by buying their debt securities (known as bonds), you are doing something called ‘lending money. When the issuer of these debts repays your loan, they pay you interest payments on your money. If there is an opportunity to make this borrowed money back again on the stock market, it is known as investing.
You might buy them through a broker who charges commission and spreads their costs over all of the investments they do. So that if you lend £10 million to one firm and just £1 million to another firm, then you will pay more total commissions than if you lent out the total of £11 million to several different companies.
Bonds allow you to lend money to commercial entities, typically governments and large corporations. However, many countries also issue bonds aimed explicitly at private individuals to purchase the debt securities offered by their government. These are known as ‘sovereign bonds’.
How to Trade with Bonds
Create an Account
Any investor who wants to trade bonds has to have an account with a broker. Saxo is an example of one of these brokers. These brokers are separate from the stockbrokers that you might already have an account with. Your broker will do it for you when you want to buy or sell something on the bond market, but they will charge a commission for their services.
Decide Whether You Want To Trade Directly or Indirectly
You can purchase bonds directly through the issuers themselves; this is known as ‘direct access. This means buying them from companies rather than via a broker. However, writing out an order in person usually involves higher transaction costs and takes up more of your time. Therefore, if you plan on doing a lot of bond trading, it is likely to be more cost-effective to trade indirectly.
Select the Right Bond
When choosing the proper bond, there are several factors that you should consider.
First and foremost is liquidity.
Liquidity concerns how easy investment is to enter and exit quickly without affecting the market price. To help ensure liquidity, always check if the issuer has repurchase agreements in place. Repurchase agreements allow for immediate cash settlement at a repo rate set by the issuer. If you look for this option when buying a bond, you will receive your money back as soon as it matures.
Understand What You’re Buying
The second factor is to understand what you are buying entirely. For example, if you have access to the debt management report of a government or company that provides information on all their debt issued, then it would be helpful to read this before investing in the bond. This way, you will get a good idea of the risks associated with the investment and how likely they are to default.
Government bonds are considered ‘risk-free’ as they are backed by state guarantees, while corporate bonds carry more risk because there is no safety net if something goes wrong for these firms.
You should also make sure that you know exactly when the issuer has said they will repay your loan to avoid any disappointments.
Negotiate With Your Broker
Now that you know everything about the bond try to determine how much commission your broker will charge. You can then speak with them and negotiate for a better rate, explain why you think it’s unfair, or go to another broker if they are unwilling to compete on price. It will save you time in the long run as many brokers compete with one another, so no one should overcharge for their services. Make sure you have got all of this information before making any trades, though.
In Conclusion
Bonds can be a great way to generate income as they offer a steady return for the investor. However, if you want to start trading with bonds, it is important that you set up an account with a broker and make sure you thoroughly understand what these financial securities are before buying and selling them. Make use of your broker’s consultation services before making any trades, and don’t forget to negotiate any fees they may charge.