How To Buy Bonds for Beginners in 2021

Published date: May 22, 2019 | 5:00 AM

Although bonds are one of the most traded financial instruments in the investment space, trying to find out how to actually buy them can be challenging for newbies. In fact, there is a lot of conflicting information out there regarding the bond buying process.

It is also important that you have a good understanding of how bonds work, how much money you are likely to make, and how risky the bond investment is.

With that being said, we’ve created the ultimate guide on how to buy bonds in the U.S. in 2019. We’ve covered absolutely everything from government bonds, municipal bonds, corporate bonds, bond ETFs, and more! We’ve even included an estimated return on investment for each bond type, as well as what levels of risk you should expect.

Before we get started, let’s take a moment to make sure we understand how bonds actually work.

In This Guide

Featured Bonds Broker 2020

Minimum deposit and investment just $5
Access to Bonds, as well as Stocks and Funds
Very user friendly platform

VISIT NOW

What are Bonds?

In its most basic form, when companies or governments need to raise cash, they have the option of issuing a bond. If you as an investor buy the bond, the institution will then pay you interest. This is usually paid to you at the end of each year. When the bonds expire, the institution will then pay your original investment back.

We’ve compiled an example below to make sure you understand the bond investment process.

You buy $10,000 worth of bonds
The yield (interest rate) is 5%
The term of the bond is 5 years
At the end of each year, you’ll get 5% in interest payments, which is $500
When the bonds expire (after 5 years), you’ll get your original $10,000 back
In total, you would have made $500 x 5 in interest, totalling $2,500.

Note: In reality, the bond investment process is not as straightforward as this. This is because the investment decision making process should also make considerations regarding the length of the bond term, the risk of the issuer, and whether the interest yield attached to the bond matches the underlying risk levels.

So now that we’ve covered how the bond investment process works, in the next section of our guide we are going to consider the pros and cons of buying bonds.

Should I Buy Bonds?

Pros

Bonds are issued by companies and governments all over the world
Earn passive income through regular interest payment
Bonds either pay interest monthly, quarterly, or yearly
Certain bonds are virtually risk-free
Higher risk bonds with higher yields also available
Suitable for both short-term and longer-term investing

Cons

If you sell your bonds early on the secondary market, you could make a loss
Buying foreign government bonds can be difficult if you’re not an institutional investor

What Different Types of Bonds Can I Buy in the U.S.?

The bond marketplace is huge. As such, there is a full range of bonds you can buy and sell. We’ll explain how each bond works further in our guide, but here’s a breakdown of what you can invest in.

Corporate Bonds: Bonds issued by large companies
Government Bonds: Bonds issued by governments
Municipal Bonds: Bonds issued by local government authorities
Property Bonds: Bonds backed by property, or to fund property developers
Bond ETFs: Trade bond prices on the open marketplace without owning the bonds

Where Can You Buy Bonds from?

US or UK bonds
Directly from the Government that issues them (for example U.S. Treasury Office)

How to Select a U.S. Online Bond Broker

Unless you are buying U.S. government bonds directly from the U.S. Treasury Office, you will need to buy your chosen bonds through a U.S. bond broker. The internet is now jam-packed with bond brokers, which gives you excellent choice. However, not all online U.S. bond brokers are legitimate, so you should also research the company before parting with your cash. To help you along the way, we’ve independently tested and reviewed all of the bond brokers we list on our site.

Here are some the things that we assess when reviewing an online bond broker in 2019.

Fees and commissions
User friendliness and customer support
Research and analytics tools
Number of investment options
Trading platforms
Offers and promotions
Number of markets accessed by the trader

Please note that due to the rise in demand for bonds in 2018 and 2019, most Stock Brokers have started offering FixedIncome products as part of their repertoire. Take into consideration that even though this might be a viable option for some papers, you won’t get all the offering of products as you would with a full FixedIncome Broker.

How to Buy Corporate Bonds in the U.S.

When we talk about corporate bonds, we are referring to bonds that are issued to companies. In other words, by lending your money to a company, you will be be paid interest until the bonds expire. Corporate bonds can be issued by companies all of sizes, from virtually any industry or sector. Unlike government bonds, if companies are unable to meet their bond payments, they don’t have the option of printing more money. As such, corporate bonds are typically higher risk. On the other hand, you should expect a higher rate of return when buying corporate bonds, in comparison to U.S. Treasuries.

You won’t be able to purchase corporate bonds directly from the company that issues them, as this is reserved for institutional investors that buy huge batches in one go. However, you can easily use an online bond broker. We’ve listed two of the best brokers to do this with in 2019.

1. StashApp

Our Rating

Super easy to use for first time investors
You can also invest in stocks and shares, and even funds
Get started from just $5

Only launched in 2015, so a very short track record
Only iOS and Android phones are supported

Visit Stash Invest Now

2. Ally Invest

Ally Invest is also relatively new to the online broker space. However, the key difference is that the platform is owned and operated by leading U.S. institution Ally Bank. The Ally Invest platform has a hugely extensive range of assets, which not only includes bonds, but stocks and shares, mutual funds, ETFs, and even options. One of main attractions of Ally Invest is that their fees are super low. Add this into the fact that the platform is simple to use, and customer service is highly rated, you have yourself an industry leading U.S. bond broker.

Investment process

Ally Invest in an online broker, meaning that you can access the platform via a desktop device or on-the-move with your mobile smartphone. As Ally Invest offers financial services, you’ll need to ensure that you are able to verify your identity. Once you do, you can then buy bonds at the click of a button.

Any interest payments that your bonds are accustomed to will go straight into your account. You then have the option of withdrawing them, or re-investing them into more bonds.

Fees and minimum deposits

Every time you make a bond investment with Ally Invest, you will pay a low fee of $1 per bond. Other than a $0.65 per-contract fee, you won’t pay anything else.

When it comes to funding your account, there is no minimum deposit to consider. Finally, Ally Invest charges a $30 fee for each withdrawal request.

How to Buy corporate bonds on Ally Invest – tutorial

Step 1: Download the Ally Invest app to your mobile device

Step 2: Open an account and enter your personal information. You’ll also need your social security number.

Step 3: Ally Invest will then attempt to verify your identity by using third-party sources.

Step 4: Once your identity is verified, you then need to make a deposit by using your debit/credit card or bank account

Step 5: Head over to the bonds section of the website.

Step 6: Choose which bonds you like the look of, enter the amount you want to purchase, and complete the trade.

Our Rating

Hugely extensive list of bonds, stocks and shares, options, and more
Industry-leading fees
Owned and operated by Ally Bank

$30 withdrawal fee

Visit Ally Invest Now

How to Buy Government Bonds in the U.S.

If you’re instead looking to buy bonds that have been issued by a government, the investment process is sometimes different. For example, if you’re looking to buy bonds issued by the U.S. government, then you can do this via the official U.S. Treasury Office website. Alternatively, if you want to buy bonds issued by state departments – otherwise known as municipal bonds, then you’ll likely need to do this with a broker.

If you’re more interested in buying bonds issued by foreign governments because of the higher rates of interest on offer, this can be problematic. You usually need to be an institutional investor to get access, due to the minimum lot sizes. However, a slight work-around is to instead invest in bond ETFs.

2. Municipal Bonds

On top of having the option of buying bonds issued by the U.S. Federal government, you can also invest in municipal bonds. These are bonds issued by lower levels of government, such as the state, city, or even regional administration. Municipal bonds are much more risky than those issued by the Federal government, not least because administrations rely on their own budget revenues.

In other words, local governments don’t have the option of simply printing more money if they can’t meet their debt obligations. However, what this does mean is that the interest yields on offer are much higher. In fact, you should expect annual yields in the region of 5-10% to reflect the underlying risk levels.

To buy municipal bonds, you’ll need to use a broker. In this respect, Fidelity Investments are your best option, as they have a range of options listed on their platform.

How to Buy Municipal Bonds Through Fidelity Investments – tutorial

Step 1: Go through the account opening process via the Fidelity Investments website or mobile app

Step 2: The KYC verification process is a lot more stringent with Fidelity Investments, so you might be required to upload documents confirming your identity.

Step 3: Once your account is open, you can then deposit some funds (no minimum).

Step 4: Head over to the bonds section of the platform and select municipal bonds.

Step 5: Scroll through the many municipal bonds available to buy and assess which ones suit your risk levels

Step 6: Enter the amount that you want to buy and complete your trade

Step 7: Your interest will be paid directly into your Fidelity Investments account

Our Rating

Ultra-safe investment
No need to use a broker
Invest as little as $100

Yields on offer are much lower than corporate bonds

Visit Fidelity Investments Now

How to Buy Property Bonds in the U.S.

If you’re looking to gain exposure to the U.S. real estate market, but you don’t have enough to buy a property outright, you might want to consider property bonds. In a nutshell, these are structured in a slightly different way to traditional bonds, as the process is achieved via crowdfunding.

For example, let’s say that the crowdfunding platform lists a $300,000 Texas property for sale. Instead of raising the money from one investor, the platform could raise 300 different investments of just $1,000. Each investor would then own the property, proportionate to the amount they invested.

In terms of making money, you are usually paid interest payments every month to reflect the rental income that the property generates. Over the course of the year, you should expect to make between 5-7% in interest. On top of this, when the property is sold, you’ll get your original investment back at the currently market value!

1. FundRise

Launched in 2010, FundRise became one of the first crowdfunding platforms to facilitate investments into the U.S. real estate arena. The team at FundRise source notable property investments on your behalf, subsequently removing the need for you to actively search for deals.

For this, you’ll pay the platform a very reasonable 0.85% annual asset management fee. FundRise pay investors on a quarterly basis as opposed to monthly, and you’ll receive your original investment back once the property is sold. Moreover, not only can you get started with an investment of just $500, but the platform claims to average annual returns of between 8.7% and 12.4%.

Investment process

Before you can get started you’ll need to open an account, verify your identity, and then deposit some funds.

Once you’re all set up, you’ll be able to view the portfolio of properties available for crowdfunding. Each opportunity will have a full set of documentation attached to it so you can perform your own due diligence. The platform also lists the anticipated returns – both in the form of rental yield and appreciation.

Fees and minimum deposit

The minimum deposit and investment at FundRise is just $500. Unfortunately you can’t use a debit or credit card, so you’ll need to perform a bank transfer to deposit funds. If the deposit is below $25,000, then you’ll need to use the ACH banking system. For deposits above $25,000, this needs to be a wire transfer.

How to Buy Bonds on FundRise – tutorial

Step 1: Open an account with FundRise

Step 2: Verify your identity by following the on-screen instructions

Step 3: Deposit funds some funds via a bank transfer (minimum $500)

Step 4: Browse through the many property investment opportunities and perform lots of research on the specific housing market

Step 5: Enter the amount you want to buy and complete the trade

Step 6: Your quarterly dividends will be paid into your account.

Step 7: When the property is sold, you’ll receive your original investment at the current market rate

Our Rating

Historical annual returns of between 8.7% and 12.4%
Gain exposure to the U.S. real estate space without needing to purchase a property outright
Diversify across multiple properties to reduce your risk

Does not accept debit or credit card deposits

Visit Fund Rise

2. Sharestates

If you’re looking to invest money into property bonds, but you don’t want to hold onto your bonds long-term, then it might be worth considering Sharestates. The platform operates in a different manner to FundRise, as you are investing in mortgage-backed loans.

You essentially help fund large-scale mortgages, and in return, you’ll receive interest. In fact, the Sharestates platform claims that annual returns average 8-12%. These are significantly more risky than the investment structure offered by FundRise, as you face the risk of default. Nevertheless, if you have a higher appetite for risk, Sharestates allow you to get started with a $5,000 minimum investment.

Investment process

You’ll need to open an account with Sharestates and deposit some funds. Once you’re all set-up, you can then browse the different mortgage-backed loans available to invest in. These usually run from 6 months up to 2 years, which is great if you don’t want your funds locked up for too long.

At the end of each month you will receive interest payments. At the end of the term, you’ll receive a one-off lump sum equal to your initial investment.

Fees and minimum deposit

You need to invest a minimum of $5,000 to get started with Sharestates.

In terms of the fees, Sharestates are not overly clear about the specific costs, however, in most cases this will average 0-2%.

How to Invest in Property Bonds via Sharestates – tutorial

Step 1: Register your details and open an investor account

Step 2: Verify your identity

Step 3: Deposit a minimum of $5,000

Step 4: Choose which mortgage-backed loans you want to invest in

Step 5: Complete your trade

Step 6: Your monthly interest payments are deposited straight into your account

Our Rating

Super high yields of between 8-12% per year
Exposure to U.S. real estate space in a short-term manner
Sharestates perform due diligence on your behalf

Minimum investment of $5,000

Visit Property Partner

How to Buy Bond ETFs in the United States

Bond ETFs are completely different to the other bond types we have discussed so far. An ETF (Exchange Traded Fund) is a financial product that tracks the movement of an asset, or group of assets. This could be anything from stock markets like the NYSE, Gold and Silver, and of course – bonds.

The key different with bond ETFs is that you do not actually own the bonds, and thus, you are not a bond holder. As such, you have no right to any interest payments. Instead, you are merely speculating on whether you think the value of the bond will go up or down in the secondary marketplace. Moreover, as ETFs are simply tracking bond prices, they never expire.

One of the best things about bond ETFs is that they give you seamless access to the foreign bond markets. As we noted earlier, unless you are an institutional investor, buying foreign bonds is virtually impossible. However, by going through a bond ETF, the process is frictionless.

Take into consideration that even though ETFs might be open as a derivate instrument of a fund of FixedIncome, this would still be considered as Stock Trading to the eyes of the regulators and IRS.

Ally Invest

Fees and minimum deposits

Ally Invest lists a good number of bond ETFs on its platform. You will pay $4.95 per bond ETF trade at both ends of the transaction.

There is no minimum deposit with Ally Invest.

How to Buy corporate bonds on Ally Invest – tutorial

Step 1: Download the Ally Invest app to your mobile device

Step 2: Enter your personal information, including your social security number.

Step 3: In most cases, Ally Invest will verify your identity instantly

Step 4: Make a deposit by using your debit/credit card or bank account

Step 5: Head over to the bond ETF section of the website.

Step 6: Once you’ve chosen the bond ETF you want to invest in, decide whether you want to buy or sell

Step 7: Enter the amount you want to invest, and complete the trade

Step 8: You can exit the trade at any time

Our Rating

Great selection of bond ETFs
Pay a flat fee of just $4.95 per bond ETF trade
Backed by Ally Bank

$30 withdrawal fee

Visit Ally Invest Now

Bond Calculator:

Featured Bonds Broker 2020

Minimum deposit and investment just $5
Access to Bonds, as well as Stocks and Funds
Very user friendly platform

VISIT NOW

Glossary of Bonds Terms

A certificate with a red and yellow rosette

Bond

A bond is when companies or goverments need to generate funds and when you invest you will receive you lump sump back with interest at the end of your agreement.

Treasury Bond

Bonds issued by the United States Department of the Treasury to finance government spending.

Treasury Note

A Treasury Note are bonds issued by the United States Department of the Treasury and last up to 10 years.

A golden crest with a blue locked padlock

Treasury Security

Treasury securities are the bonds issued to investors by the U.S. government

Municipal Bonds

A Municipal Bond is usually issued by local Governments to finance public projects such as roads, schools, and airports. You will recieve you lump sum and interest back at the end of the term.

Corporate Bonds

A Corporate Bond is issued by businesses to raise funds for expansions or projects. You will recieve you lump sum and interest back at the end of the term.

Premium Bonds

A Bond that has no interest rate but your investments are entered into prize draws to win £25 to £1mil.

A flower with a gold dollar coin as the flower

Savings Bond

Usually offered by Banks and Building Societies, Saving Bonds will last for a fixed term and earn interest. You are not able to access the money during the fixed term.

A blue and white percentage sign with a locked padlock

Fixed Rate Bonds

A Fixed Bond will start and end with same Interest Rate.

FAQs

Do I need a broker to buy government bonds?

How much do I need to invest in bonds?

How much can I earn from property bonds?

Why do municipal bonds pay such a high rate of interest?

Do I still earn interest when I invest in a bond ETF?

Can I sell my bonds before they mature?

See Our Full Range Of Bonds Resources – Bonds A-Z

Kane Pepi

Kane holds academic qualifications in the finance and financial investigation fields. With a passion for all-things finance, he currently writes for a number of online publications.

View all posts by Kane Pepi

How To Buy Bonds for Beginners 2021

What are Bonds?

Should I Buy Bonds?

What Different Types of Bonds Can I Buy in the U.S.?

Where Can You Buy Bonds from?

How to Select a U.S. Online Bond Broker

How to Buy Corporate Bonds in the U.S.

1. StashApp

2. Ally Invest

How to Buy Government Bonds in the U.S.

2. Municipal Bonds

How to Buy Property Bonds in the U.S.

1. FundRise

2. Sharestates

How to Buy Bond ETFs in the United States

Ally Invest

Glossary of Bonds Terms

FAQs

Do I need a broker to buy government bonds?

How much do I need to invest in bonds?

How much can I earn from property bonds?

Why do municipal bonds pay such a high rate of interest?

Do I still earn interest when I invest in a bond ETF?

Can I sell my bonds before they mature?

See Our Full Range Of Bonds Resources – Bonds A-Z

Kane Pepi

Kane Pepi