Bonds make up 25 to 50 percent of a diversified investment portfolio, yet most investors pay little attention to boring old bonds. Because the average investor cannot easily trade bonds like banks and hedge funds do, many have settled for the reliable but low returns of government bonds.
The average investor no longer has to sit on the sidelines of the bond market. Fractional bonds known as minis and baby bonds are opening up the bond markets to all investors. ETFs, CFDs and futures are other ways the individual investor can trade bonds through an online broker.
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2. How to Trade Bonds on Margin
- What is Ally Invest?
- Step 1 – Register an Ally Invest account
- Step 2 – Request a margin account
- Step 4 – Buy bonds on Ally
Ally has created a one-stop shop for financial products, including banking, auto lending, insurance and Ally Invest for your investment needs. At Ally Invest, you can choose a self-directed or managed portfolio investment plan. Bonds, stocks, ETFs and options can be traded at low fixed fees that decline as your trade volume increases. But why buy treasury bonds on Ally when you can buy direct from the government? Brokers allow you to buy stocks on margin. Here’s how.
From the Open Account page, sign up for an Ally Account. Fund your account by choosing your bank from the list and connecting it to Ally.
You require a minimum of $2,000 in your account to open a margin account. From All Settings, click on Add Margin to My Account. In the Cash & Balances tab on your Holdings page, the amount now available to trade is shown. The securities in your account act as collateral for the loan. So if you have $10,000 in securities and 1.5 times leverage, you will be able to trade $15,000. Ally has granted you a loan of $5,000 with interest. Ally margin loan fees range from 5.50–10 percent. Any losses beyond the margin loan will be taken from your asset balance. If your account balance falls 120 percent below the required margin, Ally will send a margin call requiring you to pay the amount or add an equivalent value in securities to your account.
3. How to Trade Bond Futures
- What is IG?
- Step 1 – Register an IG account
- Step 2 – Fund your account
- Step 3 – Choose a bond
- Step 4 – Buy a bond
IG is an LSE-listed broker licensed to provide over 16,000 markets across North America, Europe and Asia. With this global reach, IG is able to provide access to the world’s largest government bond markets, including US, UK, European, Asian and Australian bond futures, including the US Ultra T-Bond futures, UK Short Sterling, EuroBor and France’s Green Oat Bond – issued to finance climate change prevention and adaptation investments. IG provides a customizable trade layout and a wide range of indicators to accommodate both the professional and novice trader.
Register for an IG account. If your savings and investment level is below GBP 25,000, you may fall below IG account criteria and be denied an account. You will also be asked to indicate your experience trading shares and bonds, exchange-traded derivatives and OTC derivatives. Verify your account to begin trading.
Select Add Funds. From one of the three choices (Cards, PayPal, Bank), fund your account.
Under Find Markets, choose Bonds and MoneyMarket or Bonds and MoneyMarket – Mini. Mini futures contracts have revolutionized retail trading by providing retail traders access to fractional shares in contracts. IG CFDs offer minis of 20 percent the size and margin requirement of a standard contract. The popular US Ultra T-Bond futures at $10, for example, are available for $2 as minis. Then, choose the country you want to buy bonds from. We have chosen Europe.
Under European contracts, we have chosen the Eurobor-mini. You expect the European Central Bank to lower interest rates, which will increase the price of the Eurobar. The Eurobor-mini is currently trading at 10029.50. The June 2019 contract is priced at 10031.50. You could buy the contract outright today at 10029.50, or buy a mini-futures contract for a fraction of the cost. You purchase the mini-contract.
In June, the price has increased to 10033.50. You buy the contract at 10031.50 and make a profit of 2.00. Your actual profit would be the number of contracts you bought times the value per point of the Eurobar mini (20% of the standard contract $25 = $5). For one contract, the price rose 2 points, multiplied by $5 equals a gain of $10 per contract.
Had the September contract price fallen to 10029.50, you would still have to buy at this price, and therefore would realize a loss of 2.00. Conversely, if you expect bond prices to fall, you could sell a June futures contract for 10031.50. If the price falls to 10029.50, you make a profit of 2.00 points per contract.[/su_note]
4. How to Trade Corporate Bonds
- What is E*TRADE?
- Step 1 – Register an E*TRADE account
- Step 2 – Choose the corporate bond you want to trade
- Step 3 – Buy a bond
E*TRADE is one of the largest online brokers. The broker offers all types of bonds – government, munis, corporate and certificates of deposit. It also offers Baby Bonds, which trade on exchanges like stock. They are priced under $1,000 to be affordable to retail traders. There is no fee to trade US treasury securities on E*TRADE. Online secondary trading costs $1 per bond (min, $10) to a maximum of $250. Broker-assisted trades cost the offer price plus a $20 commission.
Register for an E*TRADE account. After verifying and funding your account, you will have full access to trade.
All available markets are listed in tabs across the top of the home page. Select Bonds to enter the Bond Center. Choose Corporate to trade the corporate bond market. Choose the industry. You can also specify rate, maturity and so on. Use the bond calculator to determine the price and yield of bonds.
A large selection of corporate bonds is available. Assess the credit quality by reviewing the bond ratings. Research the company fundamentals as you would for a stock. Compare the rate being charged for bonds of the same credit quality.
Choose the bond you want to buy from the order book. Enter the number of bonds you want to buy. You may be asked for a CUSIP number (a serial number used to identify US and Canadian securities). Select Buy. After reviewing the trade order, click Place Order.
Are profits from bond trading taxable?
The income earned and investment gains on bond investments is taxable. The income earned may be deferrable until the maturity date. US treasury bonds are not taxable at the municipal or state level. Munis bought in your state are not taxable at the municipal, state or federal level.
What are bond futures?
Bond futures are a financial derivative of underlying bonds used to hedge against interest rate risk or speculate on the future direction of interest rates – Will they move up or down? The buyers and sellers enter into a contract to buy or sell a bond at a predetermined date and price. On the settlement date, they settle the difference between the contract price and actual price. Short- and long-term government bonds can be traded with futures contracts with four expiry dates a year.
Can I buy bond futures online?
Yes, bond futures are sold by online brokers and available to individual investors.
What is a savings bond?
Savings bonds are debt securities backed by the U.S. Department of the Treasury. They are issued electronically from TreasuryDirect.gov and interest is paid directly to your account. Series EE U.S. Savings Bonds have a fixed rate. Series I U.S. Savings Bonds have a fixed rate adjusted for inflation. Both have a maximum investment of $10,000 per year. Through an online broker, treasury bonds can be traded in the secondary market.
What are junk bonds?
Junk bonds are corporate debt securities with a credit rating of BB or lower. In exchange for accepting a higher risk of default, the bond pays a higher yield to investors. Because they are issued by companies in weak financial health, their prices can be volatile. Whether or not you invest in junk bonds, they can be a barometer of the overall financial health of the business sector. When junk bond issuance rises, it is a sign that companies are less creditworthy.
Are mortgage-backed securities high risk?
The 2008 Global Financial Crisis was triggered by mortgage-backed securities comprised of subprime mortgages of low credit quality. These debt securities must meet higher credit standards today. ETFs provide a low cost way for retail investors to invest and trade MBSs. The iShares Core U.S.
What is a bond ladder?
A bond ladder is a portfolio of bonds with different maturity dates. A portfolio, for example, may hold 10 individual bonds maturing one year apart. Three benefits of bond ladders are: Interest rate risk diversification – Instead of being locked into one interest rate for 10 years, bonds will be renewed at the prevailing interest rate each year. Regular income stream – As these bonds mature, the interest payments can provide an annual/semi-annual income for college, retirement or other purposes. Compound interest – The bond principal (with or without the interest payments) may be reinvested in bonds to benefit from the power of compound interest. If these investments are in government bonds, they may also provide untaxable income.
What is call risk?
Call risk is the ability of a bond issuer to recall a bond before its maturity. A 10-year bond bought in January 2019 with a coupon of 2.8 percent could be recalled when interest rates fall to 1.5 percent.
Are dividend paying stocks safer than bonds?
No. Bonds must always fulfill their interest rate payment obligations whereas a company can elect not to pay dividends, in less profitable years, for example. Bond returns are historically lower than those of stocks but less volatile. Because bond returns are more predictable, bonds provide a more reliable income.