How To Buy Bonds

woman buying bonds online
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A bond is a loan that you provide to the organization issuing the bond. In return for the loan, you earn interest. Bonds are a relatively safe investment and are used to offset riskier investments like stocks.

Learn more about why and how to buy bonds.

How Do Bonds Work?

Before you invest in bonds, it’s important to know how they work. Especially if you’re a beginner investor, understanding how bonds work will help you decide which types of bonds meet your needs and how to buy them from a reputable source.

Bonds are issued by companies, governments and municipalities to raise money. When you buy a bond, you’re loaning money to provide cash flow, fund projects and finance debt.

Bonds are a preferred investment because:

  • They typically pay interest twice per year, providing income.
  • You’re repaid what you invested if you keep the bond until it matures.

Bonds are a part of most balanced portfolios, and you might increase your bond holdings as you get closer to and start retirement.

Where Is the Best Place To Buy Bonds?

The best place to buy bonds depends on your preferences and your comfort level in selecting individual bonds. When it comes to how to buy bonds online or in person, you have several options.

The U.S. Treasury Department

Considered one of the most stable investment options, U.S. government bonds are sold directly through TreasuryDirect. When investors consider how to buy bonds as a gift, they’re typically thinking of U.S. savings bonds.

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You can also purchase Treasury bonds and other Treasury securities through TreasuryDirect. You can choose between long-term bonds and shorter-term Treasury notes and bills, all of which are sold at auction:

  • Treasury bills: Short-term securities that mature in one year or less
  • Treasury notes: Mature in one to 10 years
  • Treasury bonds: Mature in over 10 years

Brokerage

One of the simplest ways to invest in bonds is to buy them directly through your broker. You can shop around for bonds being issued shortly and select those that best fit your desired returns and risk profile.

Brokerage firms mainly exist to facilitate purchases for investors of all stripes. Many provide advisory services to help you select the bonds that are best for you. They’ll charge a fee for this service, however, and, in some cases, also charge a transaction fee when you make a purchase.

If you’re considering how to buy bonds with an app, you can invest in bond funds through fund managers like Fidelity and Vanguard.

ETFs and Mutual Funds

Exchange-traded funds and bond mutual funds are both ways to pool your money with other investors’ and buy several types of bonds at once. If you find choosing individual bonds stressful, these allow you to diversify your bond portfolio with minimal stress.

New-Issue Bonds vs. Secondary-Market Bonds

When it comes to how to buy bonds as a retail investor, you can choose between new-issue bonds and secondary-market bonds.

New-issue bonds are individual bonds purchased directly from the issuer, like the U.S. government or a municipality. New-issue bonds have a set value, known as the face value, or par.

You can also shop for bonds sold on the secondary market, where you’ll purchase bonds that were already issued and then purchased by another investor. Secondary-market bonds vary in price and sometimes charge a commission and transaction fees. You might pay the same price or a higher or lower price than you would for a new-issue bond.

Pros and Cons of Bond Types

If you’ve decided it’s a good time to buy bonds, the next question is, which type? Each option has its pros and cons.

Corporate Bonds

Before you decide how to buy bonds from a company, it’s essential to evaluate the risk.

Pros:

  • Vary in duration and maturity dates

Cons:

  • Are more likely to have a low credit rating
  • May be inaccessible without a broker
  • Might have fees because a broker must be involved

Government Bonds

When it comes to how to buy bonds directly, these may be the easiest.

Pros:

  • Are accessible without a broker
  • Have high credit ratings
  • Vary in duration and maturity dates
  • Have no fees if purchased directly
  • Are exempt from state and local taxes

Cons:

  • Fewer choices
  • Pricing is more complicated

Agency Bonds

With this option, you’re loaning money to a specific government agency. For example, you might buy a bond in Fannie Mae or Freddie Mac, two government-sponsored entities that stabilize the housing market.

Pros:

  • Have high credit ratings
  • Vary in duration

Cons:

  • Are less accessible than government bonds
  • Are typically purchased on the secondary market, so fees might apply

Municipal Bonds

These support projects in municipalities around the country. They’re considered riskier than government bonds.

Pros:

  • Typically have high credit ratings
  • Vary in duration

Cons:

  • Have increased risk of default compared to government bonds
  • Might have fees because they must be purchased through a broker

Factors To Consider Before Investing In Bonds

Bonds are considered a good investment. As you consider how to buy bonds and shares of bond funds, here are factors to keep in mind.

Bond Accessibility

It’s significantly easier to buy new-issue bonds than secondary bonds. Treasury bonds are the most accessible for individuals, while corporate bonds are the most difficult to find without the assistance of a broker.

Credit Rating

Bond ratings are like credit scores. Standard & Poor’s ratings range from AAA, which are high-grade bonds usually issued by large, stable governments or corporations, to highly speculative junk bonds rated C or D. Junk bonds come from much less stable issuers but potentially offer better yields.

Advice

An entity issuing a bond with a poor rating has a higher risk of default, which puts you at higher risk of losing money. Whether you’re looking at how to buy bonds from a company or a municipality, choose bonds with a rating of BBB or better.

Duration Risk

Duration risk is tied to how much the bond’s price may fluctuate before it matures. Bonds typically move the opposite way that interest rates do. As interest rates rise, bond rates drop, and the longer a bond has until maturity, the more time there is for it to fluctuate.

Duration matters because you want your bonds to be valuable, but inflation and interest rates could impact the value you get from your bond.

Fees

Secondary-market bonds may have transaction fees, commissions and contract fees. Bond mutual funds and ETFs also might have management fees unless you have a self-directed brokerage account. ETF fees are typically lower than mutual fund fees.

Fees are essential to consider because they eat into your potential earnings.

This article has been updated with additional reporting since its original publication.

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About the Author

Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.