FXTM information and reviews
OctaFX information and reviews
XM information and reviews
FXCC information and reviews
HFM information and reviews
FxPro information and reviews

A Beginner’s Guide to Bonds – How and Where to Buy and More

Besides forex and stocks, bonds are another popular class of securities that attract many investors. In fact, bonds are traditionally a core component in many types of portfolios, most famously in conservative strategies designed for long-term performance. However, it doesn’t mean that investors with shorter time horizons should overlook bonds – with advanced trading methods, bonds can produce results over the short term as well. 

This article will explain what bonds are, how they work and how they are traditionally positioned in an investment portfolio. We will also explore different ways you can trade and invest in bonds.  

What are bonds? 

Bonds are a type of debt securities, and are issued by government bodies, private companies and other organisations as a way to raise funds. Investors who buy into the bond essentially make a loan to the party issuing the bond. In return, the issuer of the bond promises to pay back the full loan amount by a stipulated date. The issuer also provides fixed interest payments on the loan.  

Known as the coupon rate, this interest (aka dividends) is paid out at regular intervals, ranging from monthly to once a year. However, bonds commonly pay out dividends every quarter. 

Like all investments, bonds are subject to risk – specifically, default risk and interest-rate risk. You see, as bonds are basically a type of loan, the bond issuer may fail to repay the loan at maturity, creating a risk of default. When this happens, investors may not be able to get their money back. Incidentally, bonds issued by governments (including municipal and treasury bonds) are generally regarded as having lower default risk, whereas corporate bonds are seen as having higher default risk. However, this is not always true. 

As for interest-rate risk, this pertains to the inverse relationship between bond prices and prevailing interest rates (i.e., the cost of borrowing set by central banks, such as the U.S. Fed). In short, bond prices fall when interest rates rise (and vice versa), which means bondholders face devaluation of the bonds in their portfolios. Hence, bond investors have to be aware of their exposure to interest-rate risk.  

How are bonds related to stocks?

When discussing portfolio strategy, bonds are often mentioned in the same breath as stocks. You may have heard of the popular “60% stocks-40% bonds” rule of thumb, which is widely recommended as a conservative investment allocation. This is because the bond market tends to move in opposition to the stock market, as bonds are generally less volatile (and hence, lower risk) than stocks.  

Hence, when the stock market is falling, an inverter may sell off stocks in anticipation of a price drop and buy up bonds instead. When the stock market is rising, the opportunity cost of holding bonds (which do not fluctuate in price as much as stocks) becomes far higher, encouraging investors to sell bonds and buy stocks instead.    

This, of course, is an overly-simplified explanation, but it forms the basic premise for the popular practice of buying into both stocks and bonds to diversify your portfolio and hedge against risk.  

How to buy bonds? 

Similarly, you may also sell your bonds on the secondary market through a broker. If you sell at a higher price than paid, you will make a capital gain. Otherwise, if you sell at a lower price, you will make a loss.  

You can also choose to hold the bond to maturity, whereupon you will be paid the face value of the bond. You would have also collected any coupon payments you were entitled to.  

Bond Exchange Traded Funds (ETFs) 

Both directly subscribing to a bond at issuance and buying a bond on the secondary market after issuance, entails direct ownership of specific bonds. For those that prefer not to hold bonds directly or want to diversify across multiple bonds instead of choosing just a few, there is a third option. Bond ETFs are investment funds that track the performance of specific segments of the bond market. They strive to offer yields that are close to the coupon rate of the underlying bonds, although there will always be a slight difference due to the management fee charged. Unlike individual bonds, bond ETFs do not have maturity dates, as fund managers constantly rebalance underlying holdings. However, they do provide monthly dividend payments.  

Importantly, bond ETFs offer higher liquidity to investors, which means you may find it easier to sell your bond ETFs holdings when desired.

Why invest in bonds? 

Speculate on bond prices with CFDs 

Contracts for Difference (CFDs) offer a way for traders to avail themselves of opportunities in the bond market, without having to purchase bonds or own bond ETF shares. With CFDs, there is no direct exposure to individual bonds or bond funds. Instead, traders can speculate on price movements in the bond market, and may potential benefit or lose in accordance with whether the price moves as predicted.  

Additionally, CFDs allow traders to start investing in bonds with lower capital, instead of having to put up the full price of the bond. CFDs can also be executed using leverage, allowing investors to amplify the outcomes of their trade (whether for better or worse.) 


Share: Tweet this or Share on Facebook


Why Trade Precious Metals
Why Trade Precious Metals

Precious metals are a popular way to diversify a trader’s portfolio. They also act as a hedge against currency inflation or economic instability. Examples of the three most popular traded precious metals are gold...

How To Become A Successful Trader In 2023
How To Become A Successful Trader In 2023

In today's world, trading has become an attractive career choice for many individuals looking for financial independence and flexibility. However, becoming a successful trader requires more than just basic knowledge...

What is earnings season and why is it important for traders?
What is earnings season and why is it important for traders?

Every earnings season is a new opportunity to grow as an investor. An Earning Season is an important financial event and a new opportunity to grow as an investor...

Forex Copy Trading: A Complete Guide
Forex Copy Trading: A Complete Guide

Copy trading is an increasingly popular trading strategy among forex traders. Like its name suggests, copy trading involves copying or following the trades made by other traders...

Best Currency Pairs to Trade for Beginners
Best Currency Pairs to Trade for Beginners

Forex is a financial market where currencies are bought and sold to make a profit. Trading in the Forex market is done in pairs, each consisting of two currencies...

A Guide to Trading EURUSD
A Guide to Trading EURUSD

EUR/USD is the currency pair which matches the exchange rate of euro (EUR) against the US dollar (USD). Traders can trade EUR/USD using financial derivatives like contract-for-differences (CFDs)...

FXCM information and reviews
MultiBank Group information and reviews
MultiBank Group
RoboForex information and reviews
Libertex information and reviews
Vantage information and reviews
FP Markets information and reviews
FP Markets

© 2006-2023 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.