How to Buy Bonds: Investment Strategies for Beginners

If you are interested in long term lower risk investment strategies, you may be interested in learning how the bond market works and how to buy bonds. Learn the basics of investment strategies treasury and municipal securities bonds here.

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buying bonds long term investing

If you are looking for lower risk investing strategies, something you may wish to consider learning about is how to buy bonds. Investing in bonds as a beginner is not difficult to do, and it can yield a nice return on your investment. It is not a fast way to make money, but it can possibly lead to better gais over time, depending on which bond investment strategies you wish to pursue.

Keep in mind, just because bonds are considered low-risk, this does not always mean they are the best way to invest your money. There are a lot of factors to consider – you also have to take into account the opportunity cost.

If you have all of your cash for investing tied up in bonds, you may miss out on other opportunities. You also have to take into account that some bonds may not always keep up with inflation.

Still, if you wish to invest without a lot of risk, you certainly may find this information on how to invest in bonds for beginners helpful.

What is The Bond Market?

The bond market revolves around buying and selling bonds. What is a bond? Bonds essentially are a loan, except in this case, you are the “bank” – the person issuing the bond owes you whatever money you paid to buy the bond. Bonds typically are purchased from the government, financial institutions, and companies.

The way bonds are most different from stocks is that the market value of a bond does not fluctuate as much because these types of investments usually have a set time limit. For example, if you bought a savings bond that needs to mature a minimum of 10 years, you’ll find that it’s not really all that valuable, especially when you factor into things like inflation.

Here is an example: The $50 savings bond a relative purchased for us when my son was born has matured and netted us a whopping $12. Considering that was $50 we could not touch or use for that time period while we waited for it to mature, and considering $50 20 years ago is nothing like what $50 is today, it really was not the wisest way to invest $50.

However, this is not to say bonds are a bad idea. After all, it did ensure we did not spend that $50, and in that regard, it is better to have $50 saved. Also, savings bonds typically have not performed well, and there are many different types of bonds one can explore.

Buying Treasury Securities Bonds:

These are bonds which are basically fixed-interest U.S. government debt securities with a minimum maturity rate of 10 years.

Treasury security bonds can be purchased from your bank/financial institution or a broker or dealer specializing in the buying and selling of treasury bonds.

Investing in Public Works: Buying Bonds in Municipal Securities

Municipal securities are one example of the types of bonds which exist on the market. This bond market revolves around raising the  funds necessary to improve public works systems and public buildings, such as a school. On a local level, this can give you a way to help bring improvements to where you live and to gain a bit of return on your investment.

How to Buy Bonds: Understanding the Basics

You can buy bonds through a number of methods. Banks and brokerage firms typically remain the most popular method of finding bonds to purchase. However, there are also bond dealers who sell secondary market bonds, and occasionally you can buy them from the local government directly, depending of course on the location and what is available.

The local municipal bonds security market is not always easy to get into. The retail order period is when the bond is first open, and this is typically reserved for well established investors. The primary market is a bit easier, however you will still need to go through your financial institution to explore what options may be available for your level of investment.

Typically, bonds on the primary market will start at about $1,000 each. The financial institution where you purchase the bonds will be able to give you a schedule for what types of rates you may expect based on maturity.

There is also the secondary market to buy bonds. In this case, you will likely encounter a mark-up cost on the bond, as you will be most likely buying them with a mark-up fee and commission added on to the price of the bond.

This may still be less than the face value of the bond, but it is something to factor in, because it can naturally affect your overall bottom line and make you wonder if it is even worth the time to invest in bonds.

The easiest and most simple way to start buying bonds is to walk into your bank or call your bank to make an appointment to discuss all of the different options and what returns on the investment may currently be available.

Buying Bonds Through Mutual Funds

Another way to buy bonds is through municipal bond mutual funds. We have talked about mutual funds and EFTs on our blog before – and mutual funds generally are a far less riskier investment than most stocks.

Mutual funds can sometimes perform for a little bit of a better picture for a return on investment, although it is best you speak to a financial advisor licensed where you live for specific information on just how well it may perform for you.

You can buy a mutual fund through most online stock brokers, as well as through mutual fund companies. This gives you a way to diversify your stock trading portfolio into a number of different possible investment strategies.

how to buy bonds

Should You Invest Short Term or Long Term?

A common question is what is a good term length for a bond. Typically, most bonds will have a set interest rate and payment schedule, with a minimum maturity time. This minimum set period of time is a time where you absolutely cannot cash out on a bond unless you choose to sell to a dealer, and in that case you will likely lose money instead of make any return on an investment.

The treasury securities market, for instance, has bonds that will not mature until after a minimum of ten years has passed. Some bonds may have shorter timeframes, such as one year, but the return on these short-term bonds is typically not a significant amount. Still, if you want to ensure you do not spend the cash and have a decent amount to set aside, it is better than collecting zero interest.

How Investing in Bonds Works

Bond investing works the same way as you might expect with most other types of investments. You choose how much money to put in, purchase the bond, and then you cannot get the money back until the bond matures. For this reason, is is very important to understand this is a very long-term investment strategy. It is NOT like day trading or even swing trading by any means!

Most bonds typically will have a fixed value that they are worth. For example, a bond may have a face value of $100. You cannot buy a $10,000 bond if the bond is only available in $100 increments. If you wanted to invest $10,000 on a specific type of bond, you would have to do the math to determine how many bonds you need to buy.

For example, if you have $10,000 you want to invest, and the value of the bond is $100, you would need to divide $10,000 by $100 to find out how many bonds to buy, which in this case is 100.

Cashing In on Bonds

Typically to cash in on a bond, you can this through most reputable financial institutions. This is easy to do for most types of bonds.

You can also sell your bonds prior to the maturity date to a secondary market dealer. but you certainly are not going to get a very good return on investment – you could even potentially lose money on that deal. Since bonds are a long term investment, it’s typically a wiser choice to invest in if you know you will have enough to get by without the temptation of needing to cash in the bond before its maturity date.

Now that we’ve gone over the basics for how to buy bonds for beginners, you are ready to start considering about how you will invest your money for the future. If you are looking for information on something that is a little more exciting and has a bit more potential for faster return, you may also wish to check out these options:

Long Term Investment Strategies

Investing in Commodity Futures 

How to Swing Trade for Beginners

Buying Penny Stocks for Beginners

How to Invest in Stocks With Little Money

How to Make Money to Invest

Do you have any questions about investing in bonds? have you had any experiences with buying bonds you’d like to share? Comments are always welcomed below!

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