HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

A Beginner’s Guide to Bonds – How and Where to Buy and More


Besides forex and stocks, bonds are another popular class of securities that attract many investors. In fact, bonds are traditionally a core component in many types of portfolios, most famously in conservative strategies designed for long-term performance. However, it doesn’t mean that investors with shorter time horizons should overlook bonds – with advanced trading methods, bonds can produce results over the short term as well. 

This article will explain what bonds are, how they work and how they are traditionally positioned in an investment portfolio. We will also explore different ways you can trade and invest in bonds.  

What are bonds? 

Bonds are a type of debt securities, and are issued by government bodies, private companies and other organisations as a way to raise funds. Investors who buy into the bond essentially make a loan to the party issuing the bond. In return, the issuer of the bond promises to pay back the full loan amount by a stipulated date. The issuer also provides fixed interest payments on the loan.  

Known as the coupon rate, this interest (aka dividends) is paid out at regular intervals, ranging from monthly to once a year. However, bonds commonly pay out dividends every quarter. 

Like all investments, bonds are subject to risk – specifically, default risk and interest-rate risk. You see, as bonds are basically a type of loan, the bond issuer may fail to repay the loan at maturity, creating a risk of default. When this happens, investors may not be able to get their money back. Incidentally, bonds issued by governments (including municipal and treasury bonds) are generally regarded as having lower default risk, whereas corporate bonds are seen as having higher default risk. However, this is not always true. 

As for interest-rate risk, this pertains to the inverse relationship between bond prices and prevailing interest rates (i.e., the cost of borrowing set by central banks, such as the U.S. Fed). In short, bond prices fall when interest rates rise (and vice versa), which means bondholders face devaluation of the bonds in their portfolios. Hence, bond investors have to be aware of their exposure to interest-rate risk.  

How are bonds related to stocks?

When discussing portfolio strategy, bonds are often mentioned in the same breath as stocks. You may have heard of the popular “60% stocks-40% bonds” rule of thumb, which is widely recommended as a conservative investment allocation. This is because the bond market tends to move in opposition to the stock market, as bonds are generally less volatile (and hence, lower risk) than stocks.  

Hence, when the stock market is falling, an inverter may sell off stocks in anticipation of a price drop and buy up bonds instead. When the stock market is rising, the opportunity cost of holding bonds (which do not fluctuate in price as much as stocks) becomes far higher, encouraging investors to sell bonds and buy stocks instead.    

This, of course, is an overly-simplified explanation, but it forms the basic premise for the popular practice of buying into both stocks and bonds to diversify your portfolio and hedge against risk.  

How to buy bonds? 

Similarly, you may also sell your bonds on the secondary market through a broker. If you sell at a higher price than paid, you will make a capital gain. Otherwise, if you sell at a lower price, you will make a loss.  

You can also choose to hold the bond to maturity, whereupon you will be paid the face value of the bond. You would have also collected any coupon payments you were entitled to.  

Bond Exchange Traded Funds (ETFs) 

Both directly subscribing to a bond at issuance and buying a bond on the secondary market after issuance, entails direct ownership of specific bonds. For those that prefer not to hold bonds directly or want to diversify across multiple bonds instead of choosing just a few, there is a third option. Bond ETFs are investment funds that track the performance of specific segments of the bond market. They strive to offer yields that are close to the coupon rate of the underlying bonds, although there will always be a slight difference due to the management fee charged. Unlike individual bonds, bond ETFs do not have maturity dates, as fund managers constantly rebalance underlying holdings. However, they do provide monthly dividend payments.  

Importantly, bond ETFs offer higher liquidity to investors, which means you may find it easier to sell your bond ETFs holdings when desired.

Why invest in bonds? 

Speculate on bond prices with CFDs 

Contracts for Difference (CFDs) offer a way for traders to avail themselves of opportunities in the bond market, without having to purchase bonds or own bond ETF shares. With CFDs, there is no direct exposure to individual bonds or bond funds. Instead, traders can speculate on price movements in the bond market, and may potential benefit or lose in accordance with whether the price moves as predicted.  

Additionally, CFDs allow traders to start investing in bonds with lower capital, instead of having to put up the full price of the bond. CFDs can also be executed using leverage, allowing investors to amplify the outcomes of their trade (whether for better or worse.) 

#source


RELATED

A Comprehensive Guide to Initiating Your Journey in Trading

The allure of financial markets is undeniable. In light of the digital revolution and the global shifts caused by the COVID-19 pandemic...

What is forex and how does it work?

Throughout history, we have seen the transition of trading from one form to another. From the exchange of one material to another and this hasn't stopped for a moment...

Scalping: 3 Forex Trading Styles to Try

Just as a soldier doesn't willingly run into battle unarmed, a successful trader shouldn't enter the market without a strategy. Trading is not a game of chance - if you open...

Beginner's Guide to Share CFDs Trading

Prospective traders can't run out of trading options due to the avalanche of investment opportunities in the trading market. In addition to trading Forex and cryptocurrency...

Understanding Financial Market News and Trends

There are many ways to trade the financial markets, all of which require a good understanding of financial market news and trends. This requires a combination of knowledge...

How Are Commodities Traded In Simple Terms

The lookout for how are commodities Traded is as old as the financial market itself. Perhaps commodities trading is even older than the financial market...

How to Trade During the US Presidential Election?

Unless you've been hiding under a rock for the past year, you've probably heard, read, or participated in some heated discussions about the US presidential race...

Guide to Account Security: Safeguarding Against and Addressing Scams

At forex-ratings.com, your security is of paramount importance to us. Our mission is to offer you a digital environment where you can invest, trade, and communicate confidently...

Basic guide to Forex risk management strategies

Trading risk management is vital to becoming a successful trader and making money online. Learn the risks of poor risk management and discover how you could...

Stop Loss: the lifeline of every trader

Stop Loss (SL) is one of the most important concepts in the FX market. Every trader has the opportunity to benefit from this trading tool.

Why Trade Forex: All around Forex Trading

It is widely known that forex is the most traded market in the world so once someone understands its benefits, it will become easier to understand why they need to trade forex...

What is the financial market?

By definition, the term financial market refers to any marketplace where financial products are traded. These include the stock market, bond market, foreign exchange market...

An overview of platinum trading

When traders log into their metatrader 4 account and consider trading precious metals, it is most likely that the metals of gold and silver first spring to mind...

Forex Trading Robots: Your Ultimate Guide to Forex Auto Trading

Nowadays, there are numerous trading approaches and systems both for trading on forex and CFD contracts. And since it all can be transformed into a computer algorithm, the number of automated...

Six New Year Resolutions for Traders in 2023

The year 2022 is coming to an end, and the time has come for a fresh start in 2023. The end of the year is a great time for traders to review their 2022 trading performance...

LegacyFX: Commodity trading benefits

CFD Trading is a derivative financial instrument, and it is an abbreviation for "Contract for Difference". CFDs are of interest to traders who want to boost the amount and quality of their...

What should you know about cryptocurrencies?

eXcentral is expanding the number of assets and markets available for traders to invest in every month. One of the highest growing markets, if not the highest...

How to Trade Online with AvaTrade?

If you are just starting out in the world of online trading, it may feel a bit daunting, But have no fear as AvaTrade are here to support you every step of the way. With us, you will learn...

Optimizing Your Forex Trading Skills for Success in 2024 with FBS

As we approach 2024, it's an opportune moment to set resolutions for enhancing your Forex trading skills. The world of currency trading is continuously evolving, requiring traders to adapt and refine their strategies...

Trading on Forex - A Primary Source of Income

There are a lot of discussions about trading within the boundlessness of the Internet, both in conventional businesses and state-financed organizations...

FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.