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Buying bonds can potentially be a way for investors to create an additional source of income that is difficult to find in investments. However, there is more to bonds than you might think.
As an investor, I understand you risk tolerance and how to buy bonds is important. There are also different types of bonds and sources of bonds.
In this guide, we’ll talk about how to buy bonds for beginners and cover some of the key points investment conditions. Here are some things you may want to consider before investing in bonds.
How to buy bonds
There are several ways to buy bonds, including from the government, through a brokerage firm, or exchange-traded funds. The way you buy bonds depends on your investment goals.
How to buy bonds: step by step
Before investing your hard-earned money, it’s important to know how to buy bonds. Understanding how to buy a bond means knowing how to determine when the time is right to buy, knowing what type of bond to buy, and purchasing the bond from the right source.
Step 1. Determine if it’s a good time to buy
Part of the important part of investing in bonds is knowing when it’s time to buy. Bond prices fluctuate based on the current economic climate, with bond prices falling as the economy improves and interest rates rise. When the economy is in a downturn and interest rates fall, bond prices tend to go higher again. Buying during an economic boom and selling during a downturn may seem like an easy decision, but there are other things to consider.
One potential problem with this strategy is that it is usually not easy to predict market cycles. You don’t know when interest rates are going to go up or down, and you certainly don’t know when they’ve reached the highest or lowest point they’re going to reach. Bonds typically pay interest twice a year, but inflation can reduce your returns over the years. While bonds are often considered a lower-risk investment than many others types of investmentsthere is no way to reliably predict the future of the economy.
If you wait for the right time, you can wait a long time to buy bonds. The same is true if you want to sell your bond. While there may be an economic downturn in the near future, there could just as easily be a boom that will lower the value of your bond. You can not count inflationchanges in interest rates and large-scale changes that could potentially affect the economy.
One way investors can try to minimize risk when investing in bonds is through laddering. Bundling your bonds is when you buy multiple bonds that mature at different points in time. As each bond matures, the principal of that bond can be reinvested to grow the ladder, and the process repeats itself all over again.
Step 2: Decide what type of bond you want to buy
No matter what you are investing in stocks or bonds or any other type of investment, it is important to choose how to invest. There are several different types of bonds, each offered by different organizations and used for different purposes. While municipal bonds may be a suitable choice for one investor, savings bonds may be better for another. Below we’ll talk about some of the different types of bonds available to investors.
- Treasury Bonds: Treasury bonds are issued by the US Treasury, meaning they carry the full faith and credit of the US government. The government backing makes Treasuries one of the options that you usually consider when you’re just learning how to buy bonds. There are actually several types of US Treasury debt, including Treasury bills, notes, bonds, and inflation-protected securities (TIPS).
- Savings Bonds: Savings bonds are similar to Treasury bonds in that they are backed by the US government. The main difference between savings bonds and Treasuries is that with savings bonds you can potentially invest as little as $25, while Treasuries usually require a larger investment. While the interest earned on a savings bond is federally taxable, you don’t have to worry about paying state or local taxes. These bonds also cannot be bought and sold in the secondary market, unlike other types of bonds.
- Corporate Bonds: Corporate bonds are issued by companies to raise money for expenses such as construction and general business. These bonds are issued by different companies and they are divided into different categories based on the industry they are intended for. One of the advantages of corporate bonds is that you have a lot of freedom of choice, from the structure of the bond to the industry and the maturity date.
- Municipal Bonds: Municipal bonds are offered by public entities, not the US government. Instead, these bonds are offered by city, county, and state government entities and are used to cover the costs of those governments. For example, a city may issue municipal bonds to obtain the financing needed to build new roads. No two municipal bonds are the same, so experience or expert advice is helpful.
- Agency Bonds: Agency bonds may be issued and guaranteed by the US government, or they may be issued by a government-sponsored enterprise (GSE). Other GSEs include the Federal National Mortgage Association and the Federal Agricultural Mortgage Corporation. Getting all the information you need about the bonds you’re investing in is very important for agency bonds, especially if you’re dealing with the GSEs.
If you’re not sure what type of connection is right for you, you can talk to financial advisor online. Getting one-on-one advice from an expert can potentially help you better understand the different types of bonds and which bonds might fit well with your current investment portfolio. Just be aware that working with a financial advisor will cost you extra money.
Step 3: Purchase bonds from an appropriate source
Different bonds come from different sources, so it’s important to understand how to buy bonds based on how you want to invest. Generally, you can buy US Treasuries directly from the US Treasury; these bonds are sold on the Treasury Direct website. It is also possible to purchase these bonds through a brokerage firm, but there is a fee for doing so.
Treasuries are pretty much the only bonds that are easy to buy as an individual. Some of the advantages of Treasury bonds are that you can buy them without additional fees or the help of a broker.
Like some short term investment, most types of bonds are easier to invest with the help of a broker. Newer bonds are sold to the public by an underwriter who takes a sales commission. This means you don’t have to pay any additional fees.
Old bonds differ in that they are sold in the secondary market. Buying bonds in the secondary market can be difficult because the seller sets the price. The Bond Market Association does publish some municipal bond prices, but the dealer’s markup is included in those listings.
Finally, the last option is to buy bonds from exchange-traded funds. This can be one way to diversify and gain exposure to more bonds than you could invest on your own. That being said, it can be difficult to find a fund with good total returns and low expenses, so you may prefer to go the other way.
Is buying bonds the right investment for you?
From investing in gold Before buying bonds, there are many investment strategies available to individuals. So is buying bonds the right investment for you?
As with any investment, there are many things to consider when you’re thinking about buying a Treasury or savings bond. You can consider your current investment portfolio along with your financial goals; will buying bonds help you achieve your goals? Are bonds an appropriate investment based on your risk tolerance and how much you can afford to invest?
It is also important to choose the right type of bond and buy it at the right time. You also have the choice of buying through a brokerage, exchange-traded funds, or directly from the US government. If all these investment terms and decisions make your head spin, you may want to consider working with an investment advisor.
Buying bonds is one way to diversify your portfolio
Bonds can potentially be a low-risk investment for beginners to diversify their portfolios. However, the bond type, timing and source all need to be considered and chosen carefully.
If you want to diversify your portfolio with bonds, you may want to do your research before making any big purchases. Whether you’re learning to buy government bonds or investing in a bond mutual fund, patience is key. Consider talking to a financial advisor if you’re not sure where to start investing.
It is for informational purposes only and should not be construed as legal, investment, credit, debt management or tax advice. You should seek the help of a professional for tax and investment advice. Third-party links are provided for convenience and informational purposes only. Intuit is not responsible for the accuracy, legality, or content of these sites.
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