Buy Bonds in Three Steps!
These days, many people are giving bonds more priority over stocks. After all bonds do offer guaranteed interest payments and the risk involved is usually meager as compared to stock in which you never know how the company will perform. If you are interested in buying bonds then follow the below mentioned steps.
1.Choose which type of bond to buy
There are three most common types of bonds. They are explained below:
- Government bonds: These are also knows as treasuries. Bonds that governments sell are less risky as the default risk is close to none. So if you are a person that is not very risk assertive, government bonds are made for you. However, you will be offered low yields. The interest payments will not be substantial as compared to corporate bonds.
- Municipal bonds: They are popularly known as munis. These are bonds that are issued by local governments. The major benefit of munis is that the returns are free from federal tax. Moreover, local governments will sometimes make their bonds completely tax free. Cities usually do not fail so they are not that risky but keep in mind that higher coupon rate will not be given.
- Corporate bonds: Companies can issue bonds just as they issue stock on the stock market. The major benefit of corporate bonds is the higher yields. The coupon rate will be the highest in this type of bond. Interest payments will be highest in this type. But the chances of default risk and liquidation are the maximum in corporate bonds.
2.Choose which company to lend money
Say you choose corporate bonds, which are the most popular ones. You then need to decide which company to lend money to. This step requires much preparation. Do not choose a company where the interest rate is the highest. Similarly, do not go for a company simply because your gut tells you to. Research about the company, its history and corporate goals. But most importantly research about why the company needs the extra money. Do not underestimate this point as it will play a great part in shaping your judgement. Also, refer to a company’s financial statements to gauge at its financial strength. If you sense that the company is in deep problems, then stay far away from it. It is recommended that you refer to companies credit ratings. Some credit agencies rank companies based on different criteria and show the financial strength of a company. A company who receives AAA rank is better than a company that receives BB+. However, these ranks may not be completely accurate. The purpose is to give you an idea.
3.Actually buy the bond
There are three methods through which you can buy bonds.
- Using a broker: The first is to use a full-service broker or a discount broker. Full-service brokers provide you with personal, one-on-one attention but are usually very expensive for the masses to afford. Discount brokers are usually based online and are cheaper in comparison to full-service brokers but do not provide the same personal attention. You can open an account with your broker and they will carry out your bond transactions for you. However, you must be aware that some brokers may try to fool you and charge you more so you better be aware about different scams.
- Through banks: The second way to buy bonds is through banks. Some financial institutions provide the facility of transacting government securities.
- Through government’s website: You can buy bonds directly from the government’s website. All of the transactions are done electronically. However, keep in mind that not all governments offer this facility so you need to check if yours does.
These were the three steps through which you can buy bonds.