Bonds just might be the missing piece in your investment portfolio. Here’s how to buy bonds, why you might need them, and what exactly to look for.

It seems like everybody is always talking about investing as the route to wealth, but they’re pretty sparse on the details. It’s not like you drop some money on a stock or two and walk away a millionaire; you have to know how the stock market works, how to tell if something is a good investment, and perhaps more importantly, strategies to protect yourself against painful losses.

While most people might be able to give you a rough idea of what a stock is (it’s a share in a company that you buy in the hopes that it will increase in value), not as many people can rattle off the definition of a bond, or share “hot bond tips” for your portfolio. 

But bonds are just as important as stocks to your investing strategy. Depending on the bond you choose, it can give a good, dependable return and help you balance the volatility of the stocks in your portfolio.

What are bonds?

Buying Bonds: The Beginner’s Guide - What are bonds?

Before you know whether you should buy bonds, you have to know what they are. A bond is a debt security — like an IOU. It’s a promise made by a company that if you provide them money, they’ll pay you back, with interest. You loan the money by purchasing the bond.

Consider a savings bond as a common and familiar example. By purchasing a U.S. Savings Bond, you loan the U.S. government a set amount of money — say, $100. They issue you a bond and use that money for government stuff. You hang on to that bond until it matures. That’s when you “collect” on your loan to the government — they give you back your $100 initial investment (also called “face value” of the bond), plus interest.

Corporate bonds work the same way. You can buy a bond and sell it later for a certain value, or cash it in when it matures, or collect the interest over time. Municipal bonds are similar, too, only in that case, the loan goes to a local government.

The bond gives cash flow to the corporation or government in exchange for steady income for you, in the form of interest payments or dividends.

How to buy bonds

Whereas you might barely get 1% interest on a high-yield savings account these days (if that), it’s reasonable to get a 5% return on your bond investments. (Sign me up, right?)

To invest in bonds, you buy them and hold them until they mature, collecting interest, or you can buy them and try to sell them later for a profit — higher than what you sold them for.

However, unlike when you buy common stock, individual bonds don’t trade on public exchanges. You have to buy them “over-the-counter” — making it hard to track their prices and see whether you’re getting a good deal — and you’ll need a broker to arrange the sale.

Bond ETFs (exchange-traded funds), on the other hand, do trade on stock exchanges, making them more liquid than traditional bonds. They also pay coupon payments monthly rather than twice a year. The funds are made up of a number of bonds, so the fund itself never matures, and the bonds within it can change often.

The most common way to purchase bonds is from within your brokerage account, whether it’s a traditional brokerage or an online one. You can even buy bonds directly from the U.S. government. Just visit the Treasury’s website and open an account.

Whereas traditional brokerages often promote their tailored, individualized service, it’s usually accompanied by high fees. If you don’t want to pay for full service, online brokerages offer discounted fees in exchange for giving you more robust control over your portfolio.

TD Ameritrade

How To Buy Bonds: The Ultimate Beginner’s Guide - TD Ameritrade

TD Ameritrade is a great all-around platform for investing, helping you get started with investing on a well-respected platform. Your membership gives you access to a Bond Wizard that connects you with the best bonds and CDs to suit your financial goals. Just answer a few questions, review the recommendations, and purchase any you like directly from your dashboard.

Here are the commission-free securities you can trade using your TD Ameritrade account:

  • Stocks.
  • ETFs.
  • Options.
  • Fixed Income.
  • Mutual Funds.

With TD Ameritrade, you can choose from more than 40,000 assets provided by more than 100 different dealers, all commission-free. Although it can seem overwhelming, the platform walks you through the process of setting up your portfolio. You can set up alerts and access premade bond ladders to help eliminate guesswork. If you need some expert guidance, you can even request a personal portfolio review.

E*TRADE

How To Buy Bonds: The Ultimate Beginner’s Guide - E*TRADE

If selection is your priority, E*TRADE is a great choice. You’ll get access to 50,000 bonds and other fixed-income products with your membership. E*TRADE offers the following types of bonds:

  • U.S. Treasury.
  • Agency.
  • Municipal.
  • Corporate.
  • High-Yield.
  • Brokered CDs.

With E*TRADE, you get commission-free trades on all U.S. Treasury bonds. However, you’ll pay a $1 per bond commission on trades of all other bond types. In addition to an automated tool to walk you through the process of investing in bonds, you can also access a Fixed Income Specialist for expert advice.

E*TRADE can also help you create a bond ladder, either through the automated tool or with the help of a Fixed Income Specialist. A bond ladder helps you keep your risk low without locking you out of access to your money for years at a time. 

Where can you buy bonds?

You can buy bonds in a number of different places, depending on your priorities.

If you’re interested in a one-stop shop, you can buy your bonds at the same place you buy your stocks: your brokerage. But you’ll likely get bond ETFs this way, and you could end up paying fees that may eat into your returns. 

So, another option is to buy your bonds directly rather than through a brokerage.

What to know before buying bonds

Buying Bonds: The Beginner’s Guide - What to know before buying bonds

Always do your research

It’s really important to know exactly what you’re buying before you invest. A bond is sort of like an IOU; you’re basically loaning a company some money, and they’re promising to pay you back, with interest. But as with any loan, the interest rate, term length, and creditworthiness of the lendee make a difference in whether you want to lend them money.

You might be effectively loaning money to the biggest corporations or governments in the world when you buy a bond. The most dependable bond issuers are called “investment-grade.”

Stay away from junk bonds

When buying a bond, it’s probably best to stay away from “junk bonds” unless you’re truly an expert. While they do offer high yields, that’s because those bond issuers don’t have as good credit. They just might default and leave you holding the bag.

Look into the cost of your investment

Next, understand the cost of your investment: what fees or commissions are you obligated to pay? It’s easy to forget this part when you’re looking at bond prices and yields and dividends.

This is important because the fees are often expressed as a portion of your investment, and they can start really eating into your returns. Add taxes to the mix, and you might not make as much as you want. Also understand that any investment, even bonds, carries some risk. Don’t invest more than you can handle.

Who should buy bonds?

So who should buy bonds? Anyone — as long as you’re investing responsibly and have your other debts under control. In that case, investing in bonds can be very sensible. It’s important to carefully evaluate the bond itself to see whether it’s a reasonable addition to your portfolio, but if you’re looking to receive steady dividends or reduce the effects of the volatility of your stock holdings, bonds are a good choice.

When you’re younger, and you have a longer time in front of you for your portfolio to gain value, you’ll often be advised to weight your portfolio toward stocks. When you’re older and closer to retirement, the balance typically shifts away from stocks. Your comfort level with risk as well as your financial goals will inform your allocations.

What types of bonds are there?

As mentioned above, there are many types of bonds:

  • U.S. Savings Bonds, issued by the government (Series I and Series EE).
  • Treasury bonds (or Treasurys), issued by the U.S. government.
  • Corporate bonds, issued by public and private companies.
  • Municipal bonds (“munis”), issued by state and local governments.
  • Bond ETFs (exchange-traded funds), similar to mutual funds.

Basically, there’s a bond out there for you.

Why should I buy bonds?

Buying Bonds: The Beginner’s Guide - Why should I buy bonds?

Do you like a steady income? Then you’ll love investing in bonds. Investors typically turn to bonds when they want a steady drip of dividends. If you hold the bond until maturity, you’ll get your principal back. Otherwise, you can sell it.

You might think of bonds as the CDs (certificates of deposit) of the investing world. They promise a steady rate of return in exchange for stability and predictability.

When is the best time to buy bonds?

Obviously, you’ll get a better return if you buy your bonds when interest rates are super high. But unless you have a crystal ball — and an unending stream of cash — you will probably have to work with what’s in front of you. 

Trying to time investments is tricky to begin with, and because so many global events (like a pandemic, say) can have repercussions down the line, including on bond prices, getting in at the “best” time is easier said than done.

If your goal is to diversify your portfolio, then there’s no time like the present to add bonds to your investment mix.

Summary

For many people, buying bonds is a strategic part of their overall investment portfolio. It allows you to balance the volatile performance of stocks and similar equities with a more consistent, if lower-yielding, return. Whether you buy bonds directly or through your broker or another source, bonds can be an important piece of your investing journey.

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About the author

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Mary Beth Eastman is a freelance financial writer and editor. She has a degree in journalism from Bowling Green State University and enjoys spending her free time hanging with her ornery rescue dogs and making crafts.