How To Buy Corporate Bonds
A savvy investor needs to know how to buy corporate bonds. Unlike stocks, buying corporate bonds is a more complex and involved process. The corporate bond market is more opaque and sees less volume than the stock market; as such, more institutional investors rather than individual investors buy corporate bonds. However, with a little research, an individual investor can competitively play in the corporate bond market – supplementing a well-balanced portfolio.
- Determine your risk tolerance and return requirements. A corporate bond’s riskiness is determined by its bond rating. The three main bond rating agencies include Standard and Poor’s, Moody’s, and Fitch. A highly rated bond will have a lower rate of return – but, theoretically, is less likely to default.
- Research your potential investment and the fiscal soundness of the corporate issuer. A smart investor relies on more than just bond rating agencies. They also research the company they are interested in to make their own determination of fiscal soundness (and likelihood of default).
- Look to see if the corporate bond is exchange traded. The majority of the bond market is an over-the-counter (OTC) market, meaning an investor must purchase bonds through a broker. However, beginning in 2007, the New York Stock Exchange began trading a selected number of bonds. These corporate bonds are easy to buy and sell – they are bought and sold just like stocks.
- Contact a broker. If the bond you are interested in is not exchange traded, you will need to contact a broker. Most national brokerages have traders who specialize in buying and selling bonds. Many online brokers also will buy and sell bonds for their customers. Unlike stock transactions, bond transactions are usually not instantaneous as brokers must contact several bond salesmen to get the best price.
- Alternatively, contact the issuing corporation to see if they sell corporate bonds directly to individual investors. Many companies, especially larger corporations, have begun selling corporate bonds directly to individual investors. Locate a company’s homepage on the internet and look for the investor’s relation page. You will likely need to call the company directly to inquire if they will sell their bonds over the phone.
- For broader exposure, consider bond mutual funds. Bought and sold just like other mutual funds, bond mutual funds give individual investors the opportunity to own several corporate bond issuances by purchasing shares in a mutual fund. These mutual funds are typically more liquid than the corporate bonds themselves, so they may be a viable alternative for investors seeking to get into and out of corporate bonds in the short term.
To buy corporate bonds, investors must be willing to do their own research, contact brokers online or over the phone, and endure extended transaction times. In general, the bond market is less liquid than the stock market – though corporate bonds can help diversify any investor’s portfolio.