Bonds are one of the investment families commonly known as the fixed-income securities, which are debt obligations. Therefore, this means that there must be both the creditor and the debtor who pays the principal and interest earned over the period. In regard to that, several ways are available that you can use to make money with bonds. Trading fixed-income securities can be sometimes a daunting task compare to trading stocks. This is because there is no central exchange for the trading bonds. However, if you have right information and a little experience, trading bonds can become easier.
So, how can you make money with bonds? Consider the following useful tips:
1. A brokerage account
This is the very first thing that you must have before indulging yourself into this business. However, you can either decide to use an online trading account or a full service broker. In this case, your choice all depends upon your level of experience. It is important to understand the requirements of the account in order to make an order.
2. Interest rate/purchase price/sale price
These are some of the things that bonds have. If you buy one, you are then entitled to the principal payment once the bond matures and interest payment at least twice a year.
3. Price variations
Similar to stocks, bond prices also vary. During the first issue of the bond, its initial price together with interest rate is all set. From this point, the market will determine what they worth and/or whether the price is lower or higher compared to when it was issued. The interest rates of general market have a huge effect on the changes of bond prices. For instance, if the interest rates on real estate mortgages, saving accounts and bank loans go down after the bond is issued, then the price of the bond tend to go up.
4. The risk factor
Bonds also have a risk factor just like any other form of investment. For example, if a business company becomes bankrupt, all bondholders take first priority over the shareholders when paying out creditors. However, if there is no any amount of money available, your queue position is basically irrelevant.
5. The bonds ratings
In order to get the best bonds for you, it is important to carefully consider the bond ratings often issued by Moody or Standard and Poor (S&P). The two companies analyze all bonds available in the market using complex and technical formulas to produce a sliding scale valuation of the bonds. You can start from the AAA rated bonds, which are very low risk to the CCC rated bonds that are very high risk, also known as the junk bonds.
6. Research well
Doing enough research before buying bonds is very important. Try to consider various factors of the company such as possible legal issues, earning projections, the levels of debt just to mention a few. Generally, by buying bonds is granting the company a loan and just like any other lender, you would like to feel more confident that the loan interest will be paid back on time. It is also important to know whether the company is capable of repaying the loan in full amount within the agreed period.
In conclusion, if the above-discussed tips are properly put into consideration, making money with bonds can be an interesting and easy thing for most investors.