How Do I Invest in Bonds?

While it is an excellent idea to consult with a broker, a brokerage firm, or an online agency to get expert advice on the specifics of investing, you can do some of the legwork yourself to learn about bonds.

You can invest in bonds in two ways:

• Through a broker
• Buy direct

A broker can advise you as to which bonds, and other investments, best suit your needs. If you choose to use a broker, you may want to closely consider how much he or she requires as a minimum deposit, and also, what fees will be charged. If the broker claims that there are no fees charged on the purchase of a bond, be careful. Often brokers will mark up the price of the bond and take their fee from that mark up.

You can also buy some bonds directly, as with federal government bonds. By contacting the U.S. Treasury Department, you can purchase treasury bonds in smaller denominations. These bonds usually have the lowest risk of default compared to other bonds, and typically have the lowest rate of return. 

Bonds Are Loans

Put very simply, a bond is an IOU, or a loan. Essentially, when the federal government, a municipality, or an organization needs a loan, it can get one – from you the investor, in the form of bonds. With bonds, you loan these groups money, and you earn interest on that loan.

Of course this is a highly simplified definition of bonds, as there are many complexities and factors affecting the bond market in the U.S.

Types of Investment Bonds

There are typically three types of bonds, and each type is related to the issuer of the bond:

• Corporate bonds – Companies of all different types and sizes can issue these bonds, and such bonds provide the organization with the money needed to expand, improve, etc.
• Municipal bonds (or “muni’s”) – If a municipality needs to build additional schools or make necessary improvements to roads and sewer systems, it may issue bonds to help fund those projects.
• Treasury bonds – The federal government also issues bonds, through the Treasury Department. These bonds are typically considered safer than corporate bonds, so they tend to offer less attractive interest rates.

Each of these types of bonds will vary in a variety of ways, including:

• The amount of interest you are likely to earn
• The minimum amount you must have to invest
• The maturity dates available on the bonds

Bond Investment Interest Rates

Typically, when interest rates rise in the marketplace, bond prices go down. The reason is that bonds may seem less attractive because they will earn less interest compared to other things that may be earning higher yields in a higher-interest market. Conversely, when interest rates fall, the price of bonds goes up, because bonds may seem more attractive, as they may earn more interest compared to low-interest bearing alternatives.  

Bond Investment Considerations

Perhaps as important as “how do I invest in bonds” is “should I invest in bonds?”  This question depends on your personal financial situation, your long- and short-term goals, and your tolerance for risk, but remember that most financial experts recommend that you do not begin any official investment strategy until you have at least six months of your regular monthly income saved in some liquid form. This will enable you to protect your assets, including your investments, in the event of emergencies.

When considering any investment, remember that you should not take the first bit of investing advice you hear. Do your research, consult with professionals, and be sure you are doing what best suits your needs and goals.