How to Trade Corporate Bonds
Many online brokers these days offer extensive inventories of fixed income securities, including corporate bonds. The trading procedures and terminology are slightly different from stock trading but are easy to grasp. Most brokers' bond desks are manned by knowledgeable bond traders who would be happy to walk you through the process.
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Instructions
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Search the broker's online fixed income inventory. You can search by type, sector, yield, price, credit rating and maturity date. These are interconnected: the lower the quality and the longer the maturity, the higher the yield and vice versa. Most bond trading platforms allow you to do a search based on multiple criteria and display the results based on a specified parameter such as maturity, yield, price and so on.
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Select bonds that will mature at the time you will need your principal back. Regardless of what you pay for the bond, if you hold it to maturity, you will get back the face value, so you will know exactly how much money will be coming to you on a certain date.
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Estimate how much you want to invest in a single bond. Bond prices are expressed as a percentage of par, or face value. A price of 99 means you will pay $990 for each $1,000 of face value; a price of 103.24 means $1,030.24 for each $1,000 of face value. Corporate bonds trade in $1,000 denominations, so 5 bonds will be $5,000 of face value but if you have $5,000 to invest and a bond is quoted at 103.34, you will be able to buy 4 bonds ($5,000 divided by $1030.24 equals 4.85).
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Research bonds carefully before buying. Checking a bond's credit rating is not enough. Most corporate bonds are issued by publicly traded companies. Go to Yahoo! Finance and check the news linked to the bond issuer's stock to get a better feel for the company and its finances.
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Place a limit order based on the quoted price. A limit order indicates the maximum price you are willing to pay. If the bond is quoted is 101.28, place a 101.28 limit order. This way you won't get switched to a higher price by the dealer.
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Check the order total before you confirm the trade. The order entry software automatically calculates it, including the markup (commission) and any accrued interest. Bonds trade with accrued interest, which is paid semiannually. If you buy a bond between interest payments, you will receive the next full payment but owe the interest accrued up to the trade date to the seller. The amount you owe will be added to your purchase price.
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Be patient. The bond market is larger than the stock market but much less liquid. Your order may take several minutes, sometimes hours, to execute.
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Tips & Warnings
Don't attempt to trade bonds like stocks: bond prices do not fluctuate as much as stocks and spreads between the price you pay and the price you can receive are pretty wide. Buy and hold until maturity.
References
Resources
- Photo Credit business report image by Christopher Hall from Fotolia.com
