How to Buy Corporate Bonds Online
Corporate bonds represent a wide spectrum of yields, risk, maturity and credit for the individual investor. Though the corporate market is essentially an institutional traded market, it has been made easier to purchase corporate bonds through online brokerages. Most stock brokerages also carry corporate bond inventories and secondary market offerings. Corporate bond purchases online are also cheaper and cost effective compared with ordinary brokerage firms.
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Instructions
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Research and open an online account at any major brokerage firm that offers corporate bonds. Compare fee schedules for corporate bonds. Consider online reviews and the general ease of use of the trading platform before opening any account. Review whether the broker participates in new issue offerings of corporate debt as well as secondary offerings. Accounts can usually be funded online. Expect a wait of several days before trading can commence. This is to allow funds to clear banks and the application to be reviewed by the compliance department. Minimum bond purchases are usually $5000.
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Buy corporate bonds after researching ratings through a ratings subscription service such as Moody's Investment Survey or Fitch rating service. Also use the online research that should be offered for free and by subscription through your online broker.
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Study the relationship between maturity and risk. The longer the maturity the greater the yield since you must wait longer to get your principal back. However, the risk of a 1 percent increase in yields implies a decline of 1.5 percent in a two year bond, a 5 percent decline in a 10 year maturity and a 10 percent decline in principal value in 30 years.
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Understand the call feature and sinking fund features, if any, in corporate bonds. Call features allow issuers to redeem all bonds after a period of time. If interest rates are lower, the issuer may call your bonds. You would have to reinvest at a lower rate with little or no additional compensation for losing the higher interest rate. Sinking funds are early mandatory redemptions of a bond issue. Sinking funds may involve as much as 5 percent of an outstanding bond issue.
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Practice trading using the online platform of the broker you choose. Remember that if you make a mistake the cost of the error is yours, not the broker's, until the error is corrected. Your agreement with the online broker will probably state they are not responsible for online trading breakdowns due to human error, Internet interruption or if their website goes down. Make certain the broker has SIPC insurance that guarantees the value of your investment up to several million dollars. Use the broker to hold your securities. Do not take delivery of the bond receipts unless you are certain that you will not lose them.
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Apply rules of diversification. If you cannot buy more than 10 different corporate securities, consider a bond fund or bond exchange traded fund. These can all be bought online as well and provide immediate diversification and maturity mixture as well as professional management. Purchase corporate bonds in an IRA or a retirement account to defer the payment of taxes on interest payments and capital gains you may receive.
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Tips & Warnings
Consider opening two brokerage accounts to see if you prefer one broker over another over time. This also protects you if the broker decides to raise their fee schedule.
Always write down a trade on paper before entering it on the computer. Use the written document to copy into the online trading system. This reduces the chance for human error.
