Unlike stocks and shares, the process of buying bonds can be a bit more complicated. Not only do you need to have a firm understanding of how bonds work, but you also need to find a suitable broker. In fact, bonds are one of the most diverse assets that you can invest in, so it’s key you know what you are doing.
Fortunately for you, we’ve created the ultimate guide on how to buy bonds in 2019. Within it, we’ll cover everything from corporate bonds, government bonds, fixed-rate bonds, savings bonds, and more. Within each bond classification, we’ll also give you a brief overview of how each bond works, as well as the types of risk and return you should expect.
Let’s start by quickly making sure we understand what a bond actually is.
What are Bonds?
In a nutshell, bonds are a debt obligation issued by corporations and governments. You as the bondholder essentially lend money to these institutions. In return, you receive regular interest payments throughout the duration of the loan. Once the bond expires, you then receive your original investment back in one lump sum.
Let’s take a look at a quick example.
- You buy £5,000 worth of bonds
- The yield (interest rate) is 3%
- The term of the bond is 3 years
- At the end of each year, you’ll get 3% in interest payments, or £150
- When the bonds expire (after 3 years), you’ll get your £5,000 back
- In total, you would have made £150 x 3 in interest, or £450
On the other hand, companies with a poor track record are higher risk. The higher the risk, the higher the yield you should expect.
So now that you know what bonds are, let’s take a look at the pros and cons of investing in bonds.
Should I Buy Bonds?
- Gain access to a wide range of markets
- Choose from government or corporate bonds
- Receive regular interest payments
- Some bonds are very low risk
- Choose your own risk levels
- Choose how long you want to invest for
- Most bonds don’t allow you to cash out before they expire
- Access to certain bonds, such as those issued by foreign governments, can be difficult
What Different Types of Bonds Can I Buy in the UK?
There is a vast range of bonds types that you can buy. Although we will explain each bond type in more detail below, as well as how you can buy them, here is a list of the main bonds available for purchase.
- Corporate Bonds: Bonds issued by large companies
- Government Bonds: Bonds issued by governments
- Property Bonds: Bonds backed by property, or to fund property developers
- Savings Bonds: Bonds issued by banks or building societies
- Bond ETFs: Trade bond prices on the open marketplace without owning the bonds
Where Can You Buy Bonds from in the UK?
- An online broker
- Directly from the Government that issues them (for example the UK’s Debt Management Office)
How to Select a UK Online Bond Broker
If you wish to buy corporate bonds, the easiest way to do it online through an online bond broker. There are a variety of online brokers out there offering bonds, and in order to make the best investments you will need to select carefully. This includes looking at fees, customer support and the tools they offer. Luckily, we’ve tested the online bond brokers for 2019. Before we list a broker on our platform, we ensure that they meet our strict criteria.
Here are the factors that we look out for.
- 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
How to Buy Corporate Bonds in the United Kingdom
Corporate bonds allow you to lend money to companies of all sizes. They work in exactly the same way as any other bond that you will buy, insofar that you get to choose the length of the bonds, the yield, and the risk. Corporate bonds are typically riskier than government bonds, as there is always the chance that the underlying company will run in financial trouble. However, this also means that you’re likely to get a higher yield.
As an everyday investor, you won’t be able to buy corporate bonds directly from the issuer, so you’ll need to do this through a broker.
Given this criteria, here’s a list of the best brokers in the UK to buy corporate bonds from.
How to Buy Government Bonds in the UK
If you’re looking to invest in government bonds, you are essentially lending money to the government. Take note, for the average investor, it can be difficult to buy bonds that are issued by foreign governments. However, if you’re based in the UK and you want to buy bonds issued by the UK government, then this is a very simple process.
How to Buy Property Bonds in the UK
Property bonds are an excellent way to to get exposure to the ever-growing real estate space. In most cases, when you buy property bonds, you are effectively lending money to developers that require funding to build a particular project.
The developers will still pay you an annual yield, and then your original investment at the end of the term. As property bonds carry a lot more risk than traditional corporate or government bonds, the interest rates on offer are much higher. As such, you should expect to earn between 8%-12% in yields.
How to Buy Savings Bonds in the UK
Savings bonds are a bit different to other bonds that we have listed, as you will need to buy these directly from a bank or building society. They operate in a similar way to savings accounts, however, the yields on offer are much higher. Unlike savings accounts, you won’t be able to cash out your savings bonds before the maturity date.
Even if the institution does allow you to do this, there is a good chance that you will receive less than you invested. Savings bonds in the UK typically pay between 1-3%. In terms of maturity dates, savings bonds are usually available between 1-5 years.
How to Buy Bond ETFs in the United Kingdom
Bond ETFs have their pros and cons. On the one hand, you don’t actually own the underlying bond, as you are instead speculating on whether the price of the bond will go up or down in the open market. However, bond ETFs are one of the easiest ways to gain exposure to bonds that you would otherwise be unable to purchase.
A perfect example of this is foreign government bonds. Say, for example, you wanted to invest in Turkey government bonds, it would be virtually impossible to do this unless you are an institutional investor. On the contrary, you can do this online via a bond ETF at the click of a button.
Hargreaves Lansdown is a heavily regulated, highly reputable broker based in the UK. You have access to a full range of bond ETFs at the platform.
Fees and minimum deposits
£11.95 per ETF trade, £9.95 if you trade between 10-19 per month, or £5.95 for 20 trades or more.
A minimum deposit of just £1 to get started.
- One of the most established brokers in the UK
- Heavily regulated
- Excellent analisis department
- Huge list of bond ETFs
- Fees much higher than other bond ETF brokers
How to buy bond ETFs on Hargreaves Lansdown
Step 1: Open an account with Hargreaves Lansdown
Step 2: Deposit some funds into your account (debit/credit card)
Step 3: Head over to the bonds ETF page and choose which bonds you want to trade
Step 4: Decide whether you think the bond ETF will increase or decrease in value
Step 5: Enter the amount you want to invest, and place the trade
Step 6: You can sell your bond ETF investment at any time via the trading area of your account
Do I need a broker to buy corporate bonds?
Unless you are an institutional investor, then you will need to use a broker to buy corporate bonds.
What is the minimum I can invest when buying bonds
This all depends on the specific bond you are buying. While you can buy UK government bonds from as little as £100, some corporate bonds require a minimum investment of £50,000.
How much can I earn from property bonds?
As Property Bonds afford a higher level of risk in comparison to savings bonds and government bonds, expect to earn a yield of between 8% and 12%.
What happens if my savings bonds default?
If you invest in savings bonds and the underlying issuer is covered by the UK's FSCS scheme, then you will have up to £85,000 protected by the UK government. This makes savings bonds really attractive.
Do bond ETFs pay interest?
Bond ETFs don't pay interest, as you don't own the underlying bond agreement. Instead, you are speculating on whether you think the value of the underlying bond will go up or down. As such, bond ETFs never expire.
Can I cash out my property bonds early?
In the vast majority of cases, you can't. As you are lending the money directly to property developers, you won't get your money back until the agreed maturity date. Although some platforms have a secondary market, there is never any guarantee that you will find a buyer.