How Does One Buy Bonds?
Buying bonds may not be as structured and streamlined as buying stocks that are generally done with a single brokerage account. You can buy bonds with or without the help of a broker, simply because many bonds are not traded on stock-like standard exchanges that permit only direct trading among authorized members. When one buys bonds, he can purchase directly from issuers or through underwriters on the primary market, or trade with other dealers on the secondary market. For certain bonds, one can also buy through exchange trading under a quasi-membership status.
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Broker-assisted Buying
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If you have already been used to trading through brokers with buying and selling stocks, you can choose to buy bonds using the same stock brokerage account. Many brokers offer bond-trading services in addition to brokering trades on stock, options and others. Similar to assisting clients on a stock trade, the broker will quote its bid and ask prices on a bond, and one would buy the bond at the broker's asking price -- effectively the selling price for the broker. Presumably, the broker has trading relationships with other dealers, underwriters or even issuers in various bond markets to complete bond trades on behalf of its clients. However, a broker may have only selective access to bonds in the market, depending on the types of bonds the broker has chosen to offer.
Buying from Dealers
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You can also buy bonds from dealers bypassing any broker assistance. Dealers often are large financial institutions such as banks that are the primary party in bond trading and bond investors themselves. You can call or check online a dealer's bond trading desk that will publish its set of bid and asking prices on various bonds it trades. If a dealer is functioning as an underwriter for a new-bond issuer, you may have the chance to buy new issues at a bond's face value. However, when one buys bonds from different dealers, trades are done in separate accounts instead of one consolidated account when trading through a broker.
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Direct Bond Buying
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For Treasury bonds in the United States, you can even buy directly from their issuer, the U.S. Treasury Department, without going through a dealer or broker. To do that, you can set up an account on the TreasuryDirect website, managed by the U.S. Bureau of the Public Debt. With a TreasuryDirect account, you can participate in the regularly scheduled treasury auctions by entering competitive bids along with other investors including bond dealers. Some bond dealers are required to bid in treasury auctions as government-designated primary dealers.
Exchange Bond Trading
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A number of corporate bonds are available for exchange trading, which uses exchange-appointed market makers to ensure bond trading liquidity. On over-the-counter markets, the networks of market participants trading is carried out on individually-tailored non-standard terms, and many bonds may not be traded on a daily basis with no guaranteed liquidity. The New York Stock Exchange, NYSE, has a centralized bond-trading platform called NYSE Bonds, which doesn't require broker representation. Interested investors may obtain a so-called sponsored, non-member status to gain access to the bond-trading platform. NYSE grants investors the required status after singing up with a NYSE-approved trading services company that has direct access to the NYSE bonds platform to serve as an investor's sponsor.
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