Advertiser Disclosure

Investing

Charles Schwab Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Charles Schwab has been known as a leading discount broker for decades, and its online brokerage outfit maintains that reputation. Schwab isn’t cutting any corners with its online operation, and clients enjoy a lot more than just inexpensive investing.

In addition to no trading fees and no minimums, you’ll receive great around-the-clock customer service, solid execution, an easy-to-navigate website with a sophisticated trading platform, and a wealth of research and educational tools. It’s really hard to go wrong here.

Charles Schwab
VISIT CHARLES SCHWABSecuredon Charles Schwab’s secure site
The bottom line: With no trading fees and excellent tools, Schwab is a great choice for any level of investor.

  • Trading platforms and tools for both beginner and advanced investors
  • Excellent customer service
  • Wide range of no-fee investment options

Who should consider Charles Schwab

Schwab is a great option for all types of investors. Beginners will enjoy its extensive educational resources and responsive customer service, while advanced investors will love its sophisticated trading platform and screeners. All investors will appreciate fee-free trading with the benefits of a full-service broker.

Cost-conscious investors will also like Schwab for its research and plethora of commission-free exchange traded funds (ETFs) and no-load mutual funds. Anyone looking for a complete experience at a bargain price — free — will feel right at home here.

Charles Schwab fees and features

Current promotions

500 free trades with a qualifying net deposit of $100,000

Stock trading fees
  • $0.00 per trade
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $25 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android
Customer supportPhone, 24/7 live support, Chat, Email, 346 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases

Charles Schwab trading platforms and tools

Charles Schwab offers three ways to trade: a web platform, a downloadable software platform, and a mobile platform.

  • Web trading: On Schwab’s website, clients can track investments, watch the market and place trades. Customizable screeners allow you to search for specific trade opportunities. The Strategy Screener lets you search for ideas based on different technical strategies, such as which equities are performing better or worse than other stocks in their sector. News updates give you the latest intel on your holdings, and the Gain/Loss Analyzer offers analysis on your trade history.
  • Software: Schwab’s StreetSmart Edge trading platform offers streaming real-time data, including quotes and news. Customize your screen layout and take advantage of stock and ETF screeners and advanced stock charting to make decisions. View a commercial-free stream of CNBC with the latest news. You can build and place stock, ETF and options trade orders within a single window, and get alerts based on real-time bullish or bearish signals. Clients can access it via downloadable software or online via the cloud.
  • Mobile: The Schwab mobile trading app is available for iOS and Android platforms, plus the Apple Watch. From the app, you can manage your account, place trades and monitor orders and positions, and view market data in real-time. You can also access a live stream of CNBC TV and research opportunities with interactive charts.
  • Alexa: It’s worth mentioning that by enabling Schwab Skills on Amazon’s Alexa, you can use voice commands to request quotes, get market news or get a summary analysis of your favorite securities.

In addition to trading platforms, Schwab has a variety of research tools clients can use:

  • Schwab BondSource: Lets clients review Schwab’s range of fixed income offerings including new issues, bond ETFs, individual corporate and government bonds, and bond mutual funds with no loads or transaction fees.
  • ETF Screener: Schwab’s ETF Screener offers more than 100 criteria, including performance, ratings and technical data, and allows users to compare up to five ETFs at once. Schwab expert picks are available in the ETF Select List.
  • Mutual funds: Compare up to three funds at once or use Schwab’s screener to filter funds by category, fees and ratings, among other things. Expert fund picks can be found in the Schwab Mutual Fund OneSource Select List.
  • Stock screeners: Screen stocks on more than 100 criteria, including earnings, analyst ratings, company and price performance and financial strength. Clients also get access to Schwab Equity Ratings Reports, as well as Morningstar reports.

Charles Schwab investment options

Charles Schwab clients can choose from a healthy selection of investments, including more than 7,200 no-load mutual funds. The platform offers the ability to trade options, futures, bonds and fixed income products.

Although there are no trade fees for stocks, ETFs or Schwab-managed mutual funds, there are some fees associated with other trades:

  • Options: $0.65 per contract
  • Futures: $1.50 per contract
  • Futures options: $1.50 per contract
  • Treasury bonds: $0 per trade
  • CDs: $1 per certificate, $10 minimum
  • Corporate bonds: $1 per bond, $10 minimum
  • Municipal bonds: $1 per bond, $10 minimum

Margin rates at Schwab start at 9.325% for balances under $25,000. While Fidelity’s rate is the same, TD Ameritrade and E*TRADE have higher rates.

When it comes to cryptocurrency, clients with a Charles Schwab Futures account can trade Cboe Bitcoin Futures on Schwab’s StreetSmart Central or StreetSmart Mobile trading platforms. Real-time quotes for Cboe or CME Bitcoin futures prices can be monitored on StreetSmart trading platforms.

Too many options? Schwab also offers a Personalized Portfolio Builder tool that will use Schwab’s asset allocation models to help you build a diversified portfolio based on your fund preferences (mutual funds or ETFs), risk tolerance and initial investment. (There is no minimum, but Schwab recommends at least $5,000 to allow for proper diversification.)

Charles Schwab news and research resources

As a Schwab client, you have access to a wide swath of research tools, from earnings reports and breaking news from Reuters and Briefing.com to customizable options screeners and charting tools. Schwab offers Morningstar Ratings for mutual funds and ETFs, as well as market commentaries from Credit Suisse, Ned Davis, Argus and Market Edge. For stocks, Schwab offers its own proprietary Equity Ratings, Stock Lists and stock screeners, alongside third-party research from Morningstar and others. Schwab also offers ratings on over 4,000 international stocks by Schwab Equity Ratings International.

Schwab Intelligent Portfolios

If you’d rather not DIY, Schwab offers two robo-advisor options:

Schwab Intelligent Portfolios gives clients access to algorithm-based recommendations and portfolio management with no fees aside from the expenses you’ll pay on the investments themselves. You’ll get a portfolio created from ETFs chosen by experts (from a pool of 53), and your investments will be rebalanced as needed. This option requires a minimum investment of $5,000, which isn’t bad, but other robos require less: Wealthfront and E*TRADE both have account minimums of just $500, and Wealthsimple has no account minimum. (That said, Wealthfront, E*TRADE and Wealthsimple all charge for their services: 0.25% to 0.50%.)

Schwab Intelligent Portfolios Premium™ is less of a slam-dunk unless you’ve got a sizable portfolio. Clients here must bring a minimum investment of $25,000 and get access to both the site’s robo-advisor recommendations, plus one-on-one guidance from a certified financial planner. However, the service requires a one-time planning fee of $300, and a $30/month advisory fee after that. If you’re just investing $25,000, this fee is on the steep side (percentage wise), but the more you invest, the lower this fee becomes in relation to your portfolio. At $100,000, the $360 per year is just 0.36% of your portfolio. Compare that with Vanguard Personal Advisor Services fees, which are 0.30% of your portfolio and require a $50,000 minimum.

Strengths of Charles Schwab

  • Extensive research and educational tools: Schwab offers a lot of research. From market commentary to stock screeners, advanced charting to Schwab stock lists, the broker offers plenty of resources that allow you to dig for interesting stock ideas. All of that is bolstered by stock pages with news, press releases and SEC filings to help you with your primary research. There’s also free research available from Morningstar, Ned Davis, Credit Suisse, CFRA and others. It’s a wide selection of well-regarded reports. Schwab also offers an online Learning Center with on-demand educational content and virtual workshops for those looking to boost their know-how.
  • Great customer service: Need someone on the phone at 3 a.m.? Schwab can handle that. The company offers phone service 24 hours a day, seven days a week. If you don’t need that kind of reachability, Schwab also offers web chat and email. Plus, even though Charles Schwab is known for its discount online service, the company also has more than 300 branches around the U.S., so you can stop by for a full consultation.
  • Low-cost funds: Schwab has done a lot over the years to make investing low-cost, and its current selection of ETFs and mutual funds follows that tradition. The broker offers all of their more than 2,000 ETFs commission-free. Schwab also offers more than 7,200 no-load mutual funds. These funds are sold without a sales charge (otherwise known as 12b-1 fees), and Schwab offers more than 4,200 with no transaction fee.
  • Comprehensive trading platform: Schwab’s basic online trading platform is completely serviceable, offering smooth, no-frills order entry that works if you’re entering a one-off order or not trading frequently. But for advanced traders who need efficiency, Schwab’s more robust StreetSmart Edge has a lot to offer.

Drawbacks of Charles Schwab

  • Low interest paid on cash: If there’s uninvested cash in your brokerage or retirement accounts, Schwab pays just 0.06% to 0.30% APY. Schwab’s High Yield Investor Savings account pays 0.18% APY, and the High Yield Investor Checking pays 0.15% APY.
  • Fees on mutual funds: If you want to invest in a fund that isn’t one of Schwab’s no transaction-fee funds (and there’s a long list of those), you’ll pay $49.95 per transaction.

Is Charles Schwab safe?

Charles Schwab & Co. is a member of the SIPC and carries insurance of securities up to $500,000, plus excess insurance on securities and cash up to an aggregate claim amount of $600 million. Your cash deposits at Charles Schwab-affiliated banks are FDIC-protected up to the legal limit. Schwab also guarantees 100% loss coverage if you lose any assets due to unauthorized activity.

In terms of site and account technology, Schwab uses multiple layers of controls and technologies, including advanced encryption, to protect client data. They use pattern analysis and other analytics to sniff out suspicious activity, and the platform alerts you when sensitive transactions occur in your account. They also limit the number of employees who have access to your info.

Final thoughts

With no fees and no minimums, Charles Schwab investors can access thousands of low-cost funds, along with stocks and other investments. They can access a full gamut of research, 24/7 customer service and trading platforms with advanced features if needed. It’s hard to beat the total package that Schwab offers investors here. With all these perks, Schwab ranks among the best of the full-service brokers.

Open a Charles Schwab accountSecured
on Charles Schwab’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate here

Advertiser Disclosure

Investing

Review of LPL Financial

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

LPL Financial is the largest independent broker-dealer in the United States based on gross revenue. Dually registered as an investment advisor, the firm supports a network of over 16,000 affiliated advisors who operate their own businesses. LPL Financial is based in Boston, and it also has offices in San Diego and Fort Mill, S.C. The network of advisors it supports are located throughout the country. The firm’s advisors oversee nearly $159.1 billion in assets under management (AUM).

All information included in this profile is accurate as of January 23rd, 2020. For more information, please consult LPL Financial’s website.

Assets under management: $159,099,423,965
Minimum investment: Varies by service and portfolio type
Fee structure: Percentage of AUM, hourly fees, fixed fees and commissions
Headquarters:75 State Street
22nd Floor
Boston, MA 02109
617-423-3644
www.lpl.com

Overview of LPL Financial

LPL Financial was founded in 1989 after the merger of two smaller brokerage firms, Linsco and Private Ledger. With 16,109 advisors and 17,205 licensed insurance agents on its staff, LPL has $159.1 billion in assets under management LPL Financial is owned by LPL Financial Holdings, a publicly traded firm.

Advisors often choose to affiliate with LPL to tap into the firm’s technology, investment research and business building support, for which the firm earns a fee. LPL advisors maintain their own relationships with clients and negotiate their own fees and service offerings independently. LPL does not sell any of its own proprietary financial products, so advisors are free to recommend whichever investments and financial products they believe are in their clients’ best interests.

What types of clients does LPL Financial serve?

LPL Financial’s advisors serve mostly individual investors. In addition, the firm serves:

  • High net worth individuals
  • Trusts and estates
  • 401(k) plans
  • Individual retirement accounts
  • Pensions and profit-sharing plans
  • Charitable organizations
  • State and municipal entities
  • Corporations

The minimum amount of assets required to work with an LPL advisor varies depending on the service you receive. LPL does not have a minimum asset requirement for its financial planning, consulting or research services. For customized investment advisory plans, the investment minimum is up to the discretion of the advisor and is detailed in the client agreement.

Clients who opt to use one of the firm’s portfolio programs will be subject to minimum requirements that vary by program. Minimums start as low as $5,000 for Guided Wealth Portfolios and go up to $250,000 for Personal Wealth Portfolios (see more details on these options below).

Services offered by LPL Financial

LPL’s financial advisors offer the full gamut of financial planning and advisory services, such as budgeting, financial projections and selling insurance, though not all advisors offer every type of service. Among the services LPL advisors may offer are:

  • Investment advisory services and portfolio management
  • Wrap programs
  • Financial planning
  • Insurance
  • Retirement plan and pension consulting
  • Selection of other advisors
  • Workshops and seminars
  • Brokerage services

In addition to the services that LPL advisors provide directly to clients, when advisors affiliate with LPL, they get access to a range of services to help them build and manage their businesses. This includes business building ideas, compliance and technology support, investment research and the execution of trades.

How LPL Financial invests your money

Because LPL’s advisors work independently, investment approaches and strategies vary from advisor to advisor and client to client. Advisors can offer customized investment advisory services, and LPL also provides advisors with programs for investing client funds.

One option offered by LPL is the Strategic Asset Management program, which allows a high level of customization so clients can choose to exclude certain investments or emphasize others. The program offers access to a full range of investment options, including mutual funds, exchange-traded funds, equities, fixed income and alternative investments, such as non-traded real estate investment trusts and non-traditional exchange-traded funds.

Advisors who want to take a more hands-on approach with their high net worth clients can use a separately managed account wrap program from LPL called Manager Select. With this program, LPL reviews and recommends outside institutional portfolio management firms for inclusion.

For advisors who don’t want to create customized portfolios, there is also the option to invest clients’ money in one of LPL’s model portfolios. These portfolios — which include Personal Wealth Portfolios, Model Wealth Portfolios, Optimum Market Portfolios and Guided Wealth Portfolios — are professional asset allocation strategies that are created, managed and monitored by LPL. Mutual funds and ETFs make up the investments within these portfolios, but the exact mix will depend on a client’s responses to an online questionnaire about their financial goals, investment horizon and risk tolerance.

Portfolio NameInvestment Strategy
Strategic Asset Management
($25,000 minimum)
Open architecture program that allows advisors to invest client assets in mutual funds, ETFs, individual equities, variable annuities and other investments.
Manager Select
($50,000 minimum)
Separately managed wrap program for high net worth clients that uses LPL-researched and monitored institutional portfolio managers.
Personal Wealth Portfolios
($250,000 minimum)
Asset allocation investment program that combines mutual funds, ETFs and investment models for high net worth investors.
Model Wealth Portfolios
($10,000 minimum)
Program that uses strategic asset allocations to take advantage of market opportunities that will persist for the next 3 or 5 years; designed for more aggressive investors.
Optimum Market Portfolios
($10,000 minimum)
Suite of model portfolios that invests in up to six mutual funds from the Optimum Funds family.
Guided Wealth Portfolios
($5,000 minimum)
Digital investment platform for low-balance investors.

Fees LPL Financial charges for its services

It’s up to LPL advisors to determine how to charge for their services. Advisors use several fee models, including a percentage of assets under management, hourly fees, fixed fees and commissions. Fees are negotiated between clients and their advisors and detailed in the client agreement. All fees are paid directly to LPL, and LPL then shares a portion with the independent advisor representative.

That said, the firm typically charges for financial planning consulting services on an hourly or per plan basis, which is a flat rate. The maximum hourly fee that LPL advisors will charge is typically $400 per hour, while the maximum flat fee is typically $15,000.

For customized advisory services, LPL typically charges based on a percentage of assets under management. A client’s rate will be set out in their agreement with the firm. LPL states in its Form ADV that the maximum rate it generally charges is 1.50%.

For clients who opt to participate in one of the programs offered by LPL that’s laid out above, they will also pay a fee based on a percentage of assets under management. The maximum account fee is generally 2.50%.

Along with the account fees, clients may pay other miscellaneous administrative or custodial-related fees and charges. Clients are notified of these fees when they open an account, and LPL provides clients with a list of fees on its website.

LPL Financial’s highlights

  • Awards and recognition: LPL advisors consistently appear on top advisor lists. In 2019, for example, 65 LPL advisors ranked among the best advisors in their states in Forbes’ list of Best-in-State Wealth Advisors. Deborah Danielson, an advisor based in Las Vegas, ranked No. 3 in her home state on Barron’s list of 1,200 Top Financial Advisors in 2019.
  • Advisors for all types of clients: Because LPL has a vast network of advisors across the U.S., clients are likely to find an advisor whose specialty matches their needs. In addition to one-on-one advice with advisors, clients can also tap into technology-assisted portfolio management platforms similar to what they might find at a robo-advisor.
  • Inclusive workplace: Human Rights Campaign gave LPL a 100% score in its Corporate Equality Index as one of the “Best Places to Work for LGBT Equality.”

LPL Financial’s downsides

  • Advisor defections: Over the last few years, several big RIA firms have left LPL, citing the firm’s lack of service to their advisor groups. These groups included Retirement Benefits Group, which managed $10 billion, and Resources Investment Advisors, which oversaw $5 billion.
  • Potential conflicts of interest: Some LPL advisors are dually registered, meaning that they are able to charge fees for financial advice as well as for products they recommend, such as 12b-1 fees, paid to cover distribution costs for mutual funds. This could incentivize advisors to sell certain products. One way that LPL has attempted to mitigate these potential conflicts is to credit back certain fees to client accounts, thus eliminating the financial incentive.
  • Numerous disclosures: Over the years, LPL has been fined on several occasions for failing to supervise its brokers carefully, leading to sales of inappropriate and complex investment products.

LPL Financial disciplinary disclosures

LPL has had a long history of disciplinary disclosures, much of which are centered around the firm’s failure to properly supervise its brokerage practices. The firm has been ordered to pay fines and restitution as a result.

Among the most serious instances of wrongdoing, LPL was fined $26 million in 2018 for failing to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities to its customers.

In 2015, the firm was fined $11.7 million for “broad supervisory failures” in a few key areas, such as non-traditional ETFs, variable annuities, non-traded real estate investment trusts and other complex investment products. The firm was ordered to pay an additional nearly $1.7 million in restitution directly to clients who had bought non-traditional ETFs.

LPL Financial’s onboarding process

Advisors have their own onboarding process when they sign on new clients. LPL has recently streamlined its sign up process by reducing the number of fields clients must fill in and introducing a progress bar.

If you are interested in working with an LPL advisor, you can find one near you by searching on the firm’s website. You can either search for a specific advisor by name or take a look at the advisors in your area.

Is LPL Financial right for you?

With LPL’s vast network of affiliated advisors, potential clients should be able to find an advisor who can address their needs. However, LPL’s size does bring downsides — indeed, the firm has faced numerous disciplinary actions in recent years. Further, some of LPL’s advisors are dually registered as brokers and receive commissions for sales, which could create potential conflicts of interest. Some investors may prefer a smaller, more intimate advisory practice with fewer potential conflicts of interest and a more personalized feel.

Before choosing a financial advisor, it’s always important to do your research and compare several options to ensure your advisor is the right fit for you.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Avatar
Ilana Polyak |

Ilana Polyak is a writer at MagnifyMoney. You can email Ilana here

Advertiser Disclosure

Investing

Everything You Need to Know About Bonds

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

When it comes to investment news, stocks tend to dominate the headlines. Yet, bonds are just as important for investors looking to create a diversified investment portfolio. Since bonds aren’t covered as much in the news, and can be harder to understand, they can be intimidating to invest in for the first time. This guide aims to explain what you need to know about bonds as a personal investor.

What are bonds?

Government entities, public corporations and private companies issue bonds to raise money. A bond works like a loan: When an investor buys a bond, they agree to give a set amount of money to the bond issuer for a fixed amount of time. During this time period, the bond issuer pays the investor a set rate of interest, either at regular intervals or in a single installment. At the end of the bond term, the organization pays the investor back the original sum of money they lent out.

For example, you buy a $1,000 10-year bond from Google with a 5% interest rate. Every year, you will receive $50 in interest ($1,000 x 5%). At the end of 10 years, Google will give you the $1,000 back.

What’s the difference between bonds and stocks?

Companies can raise money by issuing both stocks and bonds. When you buy stock, you become a part owner of the company and get to share in their profits. When you buy a bond, you are a lender. The company agrees to pay you interest in good times and bad — it’s not based on their profits.

Stocks are riskier because your return is not guaranteed. If the company doesn’t earn a profit, you won’t receive money and your investment could lose money. With bonds, you receive the interest payments each year, plus your money back at the end of the term (unless the company runs into financial trouble). However, stocks historically have a higher long-run return than bonds. It’s a tradeoff between risk and return.

What are bond credit ratings?

Besides the interest rate, another key factor for bonds is their credit ratings. While the bond issuer promises to pay interest and your money back at the end of the term, if they run into financial trouble, they might not be able to make all the interest payments. Even worse if they go bankrupt, you might lose part or even all of your initial deposit.

That’s why as part of your research, you should check the credit rating of any organization issuing a bond. Independent agencies — Standard & Poor’s, Moody’s and Fitch are the most prominent ones— review the finances of different organizations and give them a letter score based on what they see.

If a government or company is in strong shape financially and very likely to pay the money back, they will have a high rating like AAA. Riskier bonds will have a lower rating to show they are more likely to miss payments. Bonds with a rating below BBB- on the Standard & Poor’s system lower are called junk bonds because of their extra financial risk.

Typically, a bond with a worse credit rating pays a higher interest rate — otherwise, investors wouldn’t buy them. On the other hand, safe bonds can get away with paying a lower interest rate.

How do bonds compare against CDs?

There are certain similarities between bonds and certificates of deposit (CDs). They are both I.O.U.s from an issuer, which promises to pay you interest plus your original deposit. Still, there are also some important differences between bonds and CDs.

First and foremost, CDs issued by banks are insured by the Federal Deposit Insurance Corporation (FDIC). If the issuing bank goes out of business, the FDIC will in most circumstances return your money, up to the legal limit per account. Bonds do not have this protection, so if the issuer goes bankrupt, you could lose your money.

Another difference is that you can sell bonds to other investors for a profit or loss after buying them. With bank CDs, you can take your money out early in exchange for paying a penalty fee, but generally you can’t sell the CD to another investor (unless you buy brokered CDs).

According to Steven W. Kaye, CFP and managing director of Wealth Enhancement Group, CDs are much simpler, as they only have two components, “interest rate and the term of the investment,” adding that they are “two dimensional” and “completely predictable as long as you stay within the FDIC limits.” However, he pointed out that bonds typically have better returns.

What are the different types of bonds?

The bond issuer is the main differentiator among the types of bonds: is it a company, the federal government, a state? Some of the more common bond types include:

  • Corporate bonds: Corporate bonds come from private companies like Google, Ford or Exxon. Companies in good financial condition will have a higher credit rating, whereas struggling companies will have a low credit rating.
  • Treasury bonds: Bonds from the U.S. federal government are called treasuries. They have different names based on their terms: treasury Bills have a term of one year or less, treasury notes last between two and 10 years, and treasury bonds have a term of 30 years. These are some of the safest investments in the world because they are backed by the U.S. government. You can also buy bonds issued by other national governments.
  • Savings bonds:Savings bonds are also issued by the federal government, and they pay a set interest rate on your investment. You can buy these bonds for as little as $25, much lower than other categories. Another difference is that you cannot sell a savings bond to another investor. Instead, you can redeem them early with the U.S. Treasury, in exchange for forfeiting some of your interest.
  • Municipal bonds: When state and local governments raise money, they sell municipal bonds. These can be safe, but you’ll need to check the rating, as not every state or town is in good financial shape. To help state and local governments raise money, the IRS gives municipal bonds a tax advantage: You do not need to pay federal income tax on the interest from most municipal bonds. They also may be free of state and local taxes, depending on where you live.
  • Zero-coupon bonds: While most bonds pay interest, you could also find zero-coupon bonds that do not. Instead, you buy these bonds at a lower price initially and then get more money back at the end. For example, you pay $800 and get $1,000 back in five years. That larger lump sum payment at the end can be nice, but the downside is these bonds don’t pay out interest income each year.

How do you buy bonds?

One way to buy bonds is through an investment brokerage account like Fidelity or E-Trade. If you have a retirement account like a 401(k), you could also use money in that account to buy bonds.

One way to buy bonds is directly from an organization when they release them for the first time, known as a primary issue. You can also buy and sell bonds on the secondary market from other investors. For example, you buy a 3-year old Google bond that still has seven years left of payments from an investor. This can give you more options as companies aren’t issuing new bonds every day.

Finally, there are bond mutual funds and exchange traded funds (ETFs). These are professionally managed funds that build a portfolio of many different bonds for a large group of investors. By buying into the fund, you get a small piece of the entire portfolio.

Kristi Sullivan, a CFP from Denver, thinks that funds are the best option for beginner investors because they help you get more exposure with a smaller investment.

“There are different areas of the bond market (investment grade, high yield, foreign, and various maturities) and many bond funds specialize in these sub-asset classes,” said Sullivan. “You can also buy individual bonds, but they sell for about $1,000 per bond so it takes more money to create a diversified bond portfolio that way.”

What sets the price of bonds?

When organizations issue bonds, they typically set the price for each one at $1,000. However, after the initial issue you can buy and sell bonds on the open market and the price can change.

One major factor is market interest rates. When interest rates go up, the prices of old bonds go down. If you have an old bond paying 4% but now people can go out and buy a brand-new one for 5%, you need to give them a price discount for them to accept the lower interest payments. This is called selling at a discount.

On the other hand, if interest rates go down, the price of old bonds go up. You could sell your original $1,000 bond for more than that, like $1,100. This is called selling your bond at a premium. To get an approximate value of how much your bond is worth based on its interest rate versus market rates, you can use an online calculator like this one.

Investors buy and sell bonds to each other through financial markets so the actual price you’ll receive depends on what someone else is willing to pay for your bond.

Another factor is the underlying finances of the bond issuer. If the bond issuer runs into financial trouble after you sign up, investors are going to be reluctant to buy that old bond so the price will fall to make up for the extra risk.

Are bonds a safe investment?

Bonds are a moderately safe investment, especially compared to stocks. While there is a chance you might not get your money when an issuer runs into financial trouble, if you buy higher-grade bonds you are relatively secure against facing losses. In other words, you should receive the interest plus your money back. However, as Kaye pointed out, there are other types of risk as well.

“CDs and high-quality bonds are safe in terms of default risk but have inflation risk,” he said. Recently for these kinds of investments, “rates have been so low that after you subtract income taxes and inflation, you could actually have a negative return.” Stocks, on the other hand, with their higher potential return, “provide inflation protection.” This is why a diversified portfolio has a mix of different assets, so you get all their advantages.

What are strategies for investing in bonds?

We asked financial advisors whether they had any tips for investing in bonds; here are a few they thought worth considering.

  • Stick with high-quality bonds. Kaye believes that beginners should stick with high-quality bonds, those with a high credit rating. That way you can feel confident that your interest income will come in each year and that you won’t lose your initial investment. While the higher interest rates on junk bonds may be tempting, they are more likely to lose money.
  • Avoid micromanaging: With so much research and daily news out there, beginner investors can overreact to market changes. “I am a buy-hold-annual-rebalance advisor, so I’d say don’t micromanage your bond investments,” said Sullivan. So after buying a bond, wait a year before making any buy/sell decisions.
  • Consider bond funds for lower budgets: “For those who do not have enough money to buy individual bonds, there are investments like BulletShares, which is a basket of bonds with specific maturity dates for smaller investors,” suggests Kaye.
  • Keep in mind tax breaks from municipal bonds. Marguerita Cheng, CFP and CEO of Blue Ocean Global Wealth, sometimes sees people misusing the tax breaks on municipal bonds. “It doesn’t make sense to have municipal or tax-free bonds in tax-deferred accounts, such as IRAs. The benefit to investing in municipal bonds is that they are exempt from federal & state taxes.” Since municipal bonds are already tax-free, you should keep them in a regular brokerage account while saving your retirement plan tax breaks for taxable bonds.She also says you should watch out for your state’s rules for bond taxes. “In states like Virginia, Virginia residents can purchase Virginia municipal bonds and not be subject to state or local income tax. While they can purchase bonds from another state, those would not be exempt from Virginia taxes.”
  • Consider a bond ladder. One risk with bond investments is that interest rates will change after you sign up. To get around this, you could set up a bond ladder, where you buy bonds with different maturities. For example, rather than putting all your money in 5-year bonds, you divide it up between 1-year, 3-year and 5-year bonds.If interest rates go up after you buy, you’ll be able to renew the 1-year bonds soon at a better rate. If interest rates go down after you sign up, you’ll still keep the higher rates on your longer-term bonds. By getting a mix of short and long-term bonds, you cover yourself in both scenarios.

How can someone get help investing in bonds?

If you still need some help figuring out how to trade bonds, there are ways you can prepare. First, you can see whether the broker selling the bonds can give you advice. FINRA, an investment regulatory agency, recommends that you look for a broker that specializes in bond trading so you can get this support.

Another option is to buy bond funds and ETFs. The fund prospectus will list the types of investments and fees so you can find one that’s appropriate for your situation. For more hands-on support, you could hire a financial advisor, who could recommend a suitable bond portfolio for your goals and even personally manage it for you. You would need to pay for this advice, either as an hourly fee or as a percentage of your portfolio every year.

Whichever system you use, you will be adding a valuable asset class to your portfolio that balances out your stocks. With a little research and the information in this guide, you can feel more confident about your bond investing decisions.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here