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

Guide To Choosing A Broker In 2023

Choosing a reliable broker is an important step in the career of a successful trader. It is the broker, being the intermediary between you and the market...

Investing in the stock market as a beginner

Historically, investing in stocks has been the best way to earn, increase savings, combat inflation and make sure your money is working for you. However, the sheer price of company stocks...

The gamification of trading and the case for financial literacy

Trading apps are attracting younger audiences with new investment approaches and appetites, sparking knee-jerk reactions from regulators and media...

What is Forex and how to trade on it?

The term Forex - also known as foreign currency trading, currency exchange or by its acronym FX - refers to Foreign Exchange or to transactions between currencies...

Swap, Spread and Everything You Need to Know about Forex Market Commissions

It comes as a surprise for many newbies to see a negative balance when they open their first trade, although the price has not moved. It comes to...

Ultimate guide to trading Polkadot for beginners

Blockchains and the innovations they offer largely existed as isolated entities in the crypto space, unable to share value or communicate with each other...

Best Currency Pairs to Trade and Live Happily Ever After

It is so easy to get confused in the world of financial volatility and numerous assets that the FX market offers for trading. We know what you feel. Often newbies...

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...

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...

What Financial Markets Are and Why They are Important

When we talk about stocks, currencies, bonds and cryptocurrencies, we may not think that all of these assets relate to particular financial markets. And what is a financial market, anyway?

How to become a Forex trader

While Forex is an exciting and lucrative financial market, many traders face difficulties when trying to make steady profits and grow...

MetaTrader 4 (MT4): A Comprehensive Guide

MetaTrader 4, an offering from MetaQuotes Software Corporation, has firmly rooted itself in the world of foreign exchange trading. It has become an iconic platform...

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...

Are you looking for a new hobby? Put Your Skills to Better Use

Are you looking for a new hobby, but aren't quite sure where to start? Have you considered you might be a trader? Below are a series of questions that will help...

Ultimate guide to trade Stellar Lumens (XLM) for beginners

Stellar is one of the early cryptocurrency networks that has managed to maintain a leading position in the crypto markets. With innovative services...

How to Trade Oil CFDs: A Comprehensive Guide

The oil and gas industry encompasses different types of oil, such as crude oil, no-lead gasoline, natural gas, and heating oils. Among these, crude oil remains...

MetaTrader 4 vs MetaTrader 5

The MT4 and MT5 platforms are two of the world’s leading trading platforms, used by a majority of traders worldwide. Released by MetaQuotes in 2005, MetaTrader 4 has gone on to gain widespread popularity...

The Evolution and Significance of Forex Trading

Ever since its establishment in the 1970s, forex trading has seen a rapid transformation. One of the chief driving forces behind its monumental growth has been the explosion of technology, which enabled the creation of online trading platforms...

Embarking on ETF Trading: A Beginner's Guide

Entering the world of Exchange Traded Funds (ETFs) trading might appear daunting to newcomers, but it's a surprisingly accessible endeavor, thanks to the abundance of online resources and tools available today...

Everything You Need to Know About Cryptocurrencies

The concept of money as we know it has evolved in recent years from purely physical money to a combination of the physical; digital representations of physical money...

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

© 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.