When buying a corporate bond in the secondary market, it is critically important to find out if the price paid for the bond is justified and the company track record is sound.
In the Guide to Buy Savings and Treasury Bonds you witnessed the trades and terms of buying treasury and savings bonds online. Now let me introduce you to the world of corporate bonds and how to buy them online. But first you have to understand what a corporate bond is and what its essential elements are.
Corporate bonds can be best described as debt securities. When an investor buys company stocks in a primary or secondary market, it implies the investor is part owning the company. But corporate bonds mean lending money to the company with the assured guarantee that the money will be refunded in full over a specific period of time and applicable interest will be paid. Some people prefer investing in corporate bonds because they offer higher rates of interest compared with government bonds or municipal bonds although the risks involved in corporate bonds are higher.
Types of corporate bonds
Investing in corporate bonds may be somewhat tricky and more complicated than investing in company stocks. Unlike stocks, bonds are bought and sold within a close circuit and is essentially an institutional market. There is not much scope for individual dabblers in the corporate debt market.
The corporate bond market operates in two different ways – the primary market and the secondary market. The primary market is concerned with bond issues which are new. When a company decides to raise additional capital, it sells corporate bonds through investment bankers and other venture financiers to various major institutional investors. Individual investors will however find it difficult to avail of primary bond offering. The primary corporate bond market is not meant for small and marginal investors.
While in secondary market selling and purchasing of bonds is often included in the secondary stage, after initial offering. Though small investors will find it easier to buy corporate bonds in the secondary market, extreme caution is needed. The only way the investor, novice or otherwise, buy corporate bonds in the secondary market is through a broker of their choice.
Some useful information for buying bonds
Buying corporate bonds in the secondary is complicated because dealing with corporate bonds is like trading in the stock market. Moreover, although prices of corporate bond constantly fluctuate there is not a quote system like there is for stocks.
The investor can opt to either invest in a bond mutual fund or by buy individual bonds. A bond mutual fund is akin to any other mutual fund with multiple bond issues contained in a single investment.
If the investor chooses to buy the corporate bonds directly, then careful evaluation of the bond is critically important. One has to examine the fund's performance over the last few years compared to the performance of similar funds. The investor must also learn to assess the worthiness of a company in terms of credits. There are professional rating companies that rank the corporate bonds. If the bond's ranking is low, obviously the risk factor is greater. Ratings are usually denoted by alphabets like AAA for High rating bonds and B or lower rating for junk bonds.
The pricing of bonds on the secondary market can be difficult to track and understand. Generally, an investor requests a quote for a specific amount of a specific bond or series of bonds. The broker or online system queries a bond desk which provides a buy or sell quote for the bond and amount specified. This quote is good for a limited amount of time and is known as a bona fide offer. The investor may then choose to accept the price or not.
How to buy Bonds online
Steps to buying bonds online:
- Open an account with an online brokerage who offers trading in bonds.
- Decide which bond to buy and how much to invest.
- Be aware that the broker's commission is usually included in the overall bond pricing. This is usually referred to as the spread.
- Input the bond name or symbol, as well as the quantity to purchase.
- Review the quote received. For some bonds, the quote may be near real-time. For smaller issues or lightly traded bonds, you may have to wait for a quote.
- Accept the quote by purchasing the bond.
- Receive purchase confirmation.
Your online brokerage should add the bond position to your portfolio so you can track your purchase. Keep in mind that any pricing information shown on your bond holdings is an estimated price and not a firm quote or offer to buy or sell your bonds.