Investing

How to Buy Bonds: The Ultimate Beginner’s Guide

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Investors traditionally turn to bonds as ballast for their portfolios when the stock market falls into correction or bear market territory. But knowing that bonds can help bring returns when equities won’t is one thing. Learning how to buy bonds — including the different ways you can access them in the market — is another.

Don’t worry — we’re here to walk you through all the ways you can buy bonds. From individual bonds to pooled investments like bond mutual funds and ETFs, you’ll have the knowledge you need to access them all.

Why invest in bonds?

As the stock market cycles from bear to bull and every iteration in between, your anxiety might experience similar swings. However, adding bonds to your portfolio can help you decrease risk while bringing other benefits, which your anxiety might appreciate.

  • Predictable income: Bondholders typically receive coupon payments (interest payments) until the bond matures. When market conditions can lower even the most faithful stock dividend payments, coupon payments endure in all markets.
  • Low risk and volatility: While stocks can quickly gain or lose value in volatile markets, bonds tend to hold their value when interest rates remain stable.
  • Higher yields than savings accounts: While near-zero interest rates keep savings account yields low, bonds can offer investors higher annualized returns. For example, the average July 2022 yield for investment-grade corporate bonds is 3.52%, while the average savings account yield is 0.10%.

How to buy bonds

When you’re ready to add bonds to your portfolio, there are multiple ways to invest. From individual bonds to bond mutual funds and ETFs, the best choice will be the one that makes sense for your available cash and financial goals.

Expert tip: You must buy bonds “whole.”

Unlike stocks where you can own fractional shares, you can’t buy a “bit of a bond.” Therefore, if you want to invest in individual bonds, you’ll need to know the per-bond cost to ensure you have enough available cash to complete your purchase. Otherwise, consider bond mutual funds and ETFs as ways to add bonds to your portfolio at more accessible price points.

How to buy new issue bonds

You’ll need to go straight to the source to buy individual new-issue bonds.

Government new issues

You can buy new government bonds directly from the U.S. government. You’ll go to Treasury Direct, complete an account application, select the bond type and amount you want to purchase and make your payment. You can learn more using this online tour of how the bond buying experience at Treasury Direct works.

Corporate new issues

A new corporate bond requires a relationship with the institution issuing the bonds. Ask your financial advisor or brokerage to see if they participate in new corporate issues. If they do, you’ll fund your account with the amount you want to invest in the bond issue and additional funds needed to cover broker commissions.

Municipal (muni) new issues

New munis available to retail investors (that’s you) typically go through a retail order period. During this time, your broker registers your interest in buying a specific dollar amount of bonds. Once the order period is closed, the issuer sells bonds to interested investors based on a predetermined priority order.

How to buy individual bonds on the secondary market

If you’re not buying bonds on the primary market (new issue), you’re buying them on the secondary market.

Buying on the secondary market is like buying stock on the stock market. First, you can review available bonds for sale and place your order through your broker’s online portal. Then, the bond lands in your brokerage account with the rest of your securities.

When buying bonds on the secondary market, do your due diligence. You’ll want to review everything about a bond before you make the buy, including standard bond features like:

  • Bond term, especially how long is left on the term.
  • Coupon rates and dates, which dictate when you’ll receive interest payments, as well as how much you’ll receive.
  • Maturity date, which is the date the issuer will pay you the bond’s face value.

Be sure to check an individual’s bond price on multiple exchanges, too. While stocks will have the same net asset value (NAV) price no matter the brokerage, bond prices will vary depending on the offering broker. This is because brokers tend to bundle “mark-ups” (commissions) into bond prices, which is why the same bond can have a different price on different exchanges.

If you need a refresher on bond terms or varieties while searching for the right individual bonds, check out our guide to what bonds are and how they work.

How to invest in bond mutual funds

Since individual bonds can cost upwards of $1,000 each, you might not have that kind of cash to invest. If that’s the case, you can diversify your portfolio using a bond mutual fund.

Bond mutual funds are pooled investments. Fund managers buy a wide variety of individual bonds — related by price, type or duration — then sell shares of that “pool” at much lower prices than individual bonds.

When you diversify your portfolio using bond mutual funds, you get:

  • Professional research and fund management. Enjoy the benefits of experienced fund managers well-versed in the bond market and at a low per-share price.
  • Built-in diversification. Bond fund managers build well-balanced, diversified portfolios to manage risk, which means you benefit from their diversification efforts.
  • Monthly dividends. Many bond mutual funds pay monthly dividends, which you can take as income or reinvest in the fund.

You can buy bond mutual funds from almost any online broker — just navigate to the platform’s screening tool and search for the type of bond fund you want. Then, enter an order for the number of shares you want. Mutual fund orders are only executed once per market day, at the close of the market — 4 p.m. ET. Once your trade is confirmed, you’ll find the shares in your portfolio.

How to invest in bond ETFs

Bond ETFs are similar to mutual funds — they’re pooled investments where you can access bonds at a lower price than individual bonds. Bond ETFs build portfolios of individual bonds designed to achieve a particular investment strategy.

However, unlike most mutual funds, most bond ETFs are passively managed. This means that no fund manager actively trades bonds in the portfolio. While actively managed bond ETFs exist, they’re still in the minority.

When you diversify your portfolio using bond ETFs, you get:

  • Lower fees than bond mutual funds. Passive management cuts down on fund overhead, passing the savings on to you through lower expense ratios.
  • Lower investment minimums. Many bond mutual funds have investment minimums, while you’d only need enough money to buy one share of a bond ETF.
  • High liquidity. Unlike mutual funds that only trade at the close of every market day, you can quickly and easily trade bond ETFs like any stock during regular market hours.

As we said in our primer on how to buy stocks, bonds are the pepper for a well-balanced portfolio. Now that you know how to buy bonds — no matter how much you have to invest — you can add that dash of pepper your portfolio needs to reduce your risk and ease your anxiety.

Frequently asked questions

Knowing the type of bond you want will help determine where to buy it. For example, Treasury bonds can be purchased directly from the government through Treasury Direct. On the other hand, you can buy individual bonds, like corporate and municipal bonds, most easily on secondary markets through online brokers that offer individual bonds.
You can purchase digital Series I Savings Bonds directly from the U.S. Treasury. However, if you prefer paper bonds, you can use part or all of your federal income tax refund to purchase Series I Bonds.
Yes, you can still buy U.S. Savings Bonds. But, if you need a refresher, learn how savings bonds work and how to buy them.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.