How to Buy Bonds

For investors seeking securities with lower risks, investing in bonds is a reasonable option. How should an investor pick where to buy bonds? It depends on the type of bonds intended for purchase. Owning a bond mutual fund or bond ETF is the simplest way to start in the bond market, and these are readily available through many online brokerages. Investors interested in specific bonds can purchase bonds through brokers, or for U.S. Treasury fixed income securities, directly from the Treasury.

Buying Bond Mutual Funds or ETFs from Online Brokerages

If you’re looking to diversify your investments without the hassle of buying individual bonds and holding to maturity, buying bond mutual funds or ETFs through online brokerages may be the best choice for you. All fifteen online brokerages we surveyed offer bond ETFs and bond mutual funds for trade.

With mutual or exchange traded funds, you can hold many more bonds than if you bought bonds individually, due to the minimum purchase requirements. Generally, the cost to trade bond mutual funds or bond ETFs is lower than the cost to trade bonds. While there are a few brokers that offer commission free ETFs, generally, the typical company charges $8.90 on average fee to trade ETFs and stocks. The average trading fee for non-U.S. Treasury bonds is $23.69, about 2.9 times higher than the cost to trade an ETF.

The average cost to trade mutual funds is $30.55, 17% higher than than the average trading fee for non-U.S. Treasury bonds. However, many online brokerages also offer no-transaction fee (NTF) mutual funds, which can lower the trading costs significantly.

Online Brokerage

Bond Trading Fee (non-Treasuries)Fee per Trade (Stocks, ETFs)Mutual Fund Purchase Fee

Fidelity

$8.00$7.95$49.95

TradeKing

10.004.959.95

Charles Schwab

10.008.9576.00

Tradestation

15.009.9914.95

e*Trade

20.009.9919.99

optionshouse

25.004.9520.00

TD Ameritrade

25.009.9949.99

Merrill Edge

29.956.9519.95

Firstrade

30.006.959.95

Scottrade

32.007.0017.00

T. Rowe Price

35.0019.9535.00

WF WellsTrade

50.008.9535.00

TIAA-CREF Self-Directed Brokerage

50.0014.9550.00

Sharebuilder (CapitalOne)

N/A6.9519.95

SogoTrade

N/A5.00N/A

Average

$26.15$8.90$30.55

Buying Individual Bonds from Online Brokerages

More than 80% of the online brokerages we surveyed offered bonds - Treasury, municipal and corporate bonds - for trade. Pricing for bond trades vary for different brokerages, so it is very important for investors seeking to buy individual bonds through online brokerages to be aware of the fees they may be charged.

For non-U.S. Treasury bonds, TIAA-CREF and Wells Trade charge a minimum of $50 transaction fee, the highest among the 13 offering bonds for purchase. Fidelity charges the lowest bond transaction fee at $8.00, only five cents higher than its stock/ETF base trade fee of $7.95. Sharebuilder from Capital One and SogoTrade don't offer investors the ability to buy individual bonds.

All 13 of the brokerages offering bonds also offer US Treasury fixed income notes for no fee, albeit with a minimum purchase requirement. When you buy U.S. Treasury or other municipal bonds from online brokerages, the brokerage acts as principal on the bond transaction. When acting as principal, the brokerages add a markup to any purchase, and subtract a markdown from every sale. This markup or markdown will be included in the price quoted to you. So while you may not be charged a transaction fee, the markup or markdown will add to the cost of your trade.

Buying Bonds through the Treasury Direct Program

The U.S Department of Treasury runs the TreasuryDirect website , which lets investors buy and redeem securities directly from the Treasury in electronic form. In order to open a TreasuryDirect account, an investor must have a valid social security number (SSN), be 18 years of age or over, and be legally competent. The account owner must have a United States address of record and have an account at a United States bank. Opening an account with the TreasuryDirect is as simple or simpler as opening an account at any online brokerage.

For investors interested primarily in U.S. Treasury bonds, purchasing them directly from the Treasury is more cost-effective than purchasing through online brokerages. Unlike brokerages, the U.S. Treasury offers the bond’s price with no markup. There are no transaction fees associated with buying bonds directly from the Treasury. It'll just be one more investment account you'll have to track or maintain.

What to Consider When Buying Bonds

Ultimately, investors should consider their investing style and priorities when choosing how to invest in bonds. Some factors to consider are:

Portfolio Diversification:

Buying individual bonds, like buying individual stocks, can be risky since you are pooling risk on one security. You don’t want to put all your money into a single bond, since there is a risk of default even on the highest rated bonds. It’s difficult to diversify a bond portfolio unless you have a large amount of investable funds due to minimum purchase requirements, which can be from $5,000 onwards. Therefore, if you’re looking for diversified investments in bonds, or have lower investable funds, we would consider investing in bond mutual funds or bond ETFs instead of individual bonds.

Simplification / Consolidation of Accounts:

Buying bonds directly through the Treasury can save you some money in trading costs. However, it also adds another account to your portfolio that you must monitor. While this may be a minor consideration for the beginner, investors with complex investment scenarios should keep simplicity in mind.

Market Liquidity:

Certain bond types are more easily traded than others; Treasuries are easier to sell than most municipal bonds. While individual bonds can be sold before maturity, selling before maturity can result in a loss. If you use an online brokerage, additional transaction fees may apply should you sell an individual bond before maturity. Bond mutual funds and bond ETFs are generally considered more easily traded than individual bonds. Consider your own liquidity needs before investing in individual bonds.

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