| Trading bonds can seem a bit difficult compare to | | | | they're likely to rise, well, that's a lot more complex, |
| stocks, because there's no central exchange for | | | | and certainly outside the scope of this article. |
| trading bonds. Still, once you learn what you're doing, | | | | A common expression in bonds trading is 'over 100', |
| trading bonds becomes a lot easier. | | | | which means that a bond is trading at a premium to |
| To start, you need a brokerage account. It's your | | | | its issue price, and bonds that are 'under 10' are |
| choice whether you go with a full-service broker or | | | | trading at a discount. The 100 refers to 100%, where |
| an online trading account. Possibly your own level of | | | | 100% is the initial price. |
| experience may help you to make that choice. Make | | | | Like all investments, bonds have a risk factor. If a |
| sure you understand what the account requires you | | | | company goes bankrupt, bondholders do take priority |
| to do in order to place an order. You don't want to | | | | over shareholders when it comes to paying out |
| find yourself needing to place an order but unable to | | | | creditors, but if there's no money available anyway, |
| do so because you're traveling and don't have | | | | your place in the queue is basically irrelevant. A lot of |
| internet access, as an example. | | | | bonds are fairly low risk, as generally it's expected |
| Bonds have a purchase price, a sale price, and also an | | | | that you'd at least receive your money back in a |
| interest rate. If you purchase one, you (as the | | | | crisis, but the lower the risk, generally the lower the |
| bondholder) are entitled to payment of the principal | | | | return on the bonds. |
| when the bond matures, as well as interest | | | | To help you assess which bonds are best for you, |
| payments twice a year. | | | | it's worth taking a look at the bonds ratings issued by |
| In the same way as stocks, the prices of bonds | | | | Standard and Poor (S&P) or Moody. These |
| vary. When a bond is first issue, its initial price and | | | | companies analyze bonds using very complex, |
| interest rate are set. From then on, the market | | | | technical formulas, in order to produce a simple sliding |
| dictates what they're worth, and whether it's higher | | | | scale valuation of bonds. You can go from the very |
| or lower than it was when issued. General market | | | | low risk or AAA rated bonds, right through to the |
| interest rates have a major impact on the | | | | CCC bonds, which are very high risk and are often |
| movement of bond prices. If the interest rates on | | | | referred to as junk bonds. |
| bank loans, real estate mortgages, and savings | | | | Make sure you do your homework before buying |
| accounts drop after the issue of the bond, then the | | | | bonds - check out the company, including earnings |
| bond's price will tend to rise. | | | | projections, possible legal issues, levels of debt and |
| This isn't had to understand. If you're holding a bond | | | | so on. Basically, you're going to be granting that |
| that was issued that pays at an interest rate of 7%, | | | | company a loan, and like all lenders, you want to feel |
| and cash deposits drop to a return of 6%, then | | | | confident that the interest will be paid on time, and |
| naturally your bond will be worth more and its price | | | | that the company will be able to repay the loan in full |
| will rise. Basically, your bond pays more in interest | | | | at the agreed time. |
| than a competing investment. As to how much | | | | |