May 24, 2011, 11:56 p.m.
posted by handcore
Buy Bonds Online
Online trading for bonds isn't in the same league as online stock trading, but a few brokerage firms offer true electronic bond trading.
When a corporation or government borrows money, it issues bonds [Hack #80], which are nothing more than promissory notes. The organization that issues bonds pays interest to the people who loan them money—the investors who purchase the bonds. After a period of time, the organization pays the money it borrowed back to the bondholders. Many investors purchase bonds to receive a steady stream of income. However, bonds can also provide capital gains when interest rates fall. Sad to say, online bond trading hasn't kept pace with its electronic stock trading counterpart. Many online brokers act as if they offer online bond trading, but the service might be no more than a glorified messenger service, in which the online trade forwards the order information to a human broker who fills the order the old-fashioned way. Other brokers provide online research but resort to phone calls for orders. However, a few brokers are starting to offer automated bond trading for individual investors. The services are fairly limited and fees can be high, so review your options carefully before you become an online bond trading pioneer.
Although many brokerage companies are beefing up their electronic bond trading systems, the beneficiaries of these enhancements are often professional traders. However, plans are in the works to build electronic trading networks similar to those available for stocks that enable the automatic cross-matching and execution of anonymous buy and sell orders. These systems that cater to professional investors are becoming the infrastructure for electronic bond trading services aimed at individuals. For example, E*TRADE (http://www.etrade.com) now offers an online bond trading center for individuals based on software and bond data provided by BondDesk.com (http://www.bonddesk.com).
In the world of electronic bond trading, the steps are similar to those for stocks. Specify the following items:
Whether you want to buy or sell a bond.
The bond CUSIP, which is its unique identifier. You can search for bonds using E*TRADE Bond Finder feature.
The number of bonds you want to trade.
The price or yield at which you want to place the order. You can also place a market order to accept the going price or yield.
You can preview the order before you submit it or review your open orders. You receive an electronic alert when the order executes.
1 Keep an Eye on Online Bond Trading Fees
Commissions and fees for buying bonds that have already been issued can be so high that they remove any potential for your investment. In many cases, you're better off buying new bond issues. Although investors can purchase one bond at a time online, the fees for small trades can be so exorbitant and the yields so pitiful that they just aren't worth it. Most brokerages embed their commissions in the price of bonds. Because there's no easy way to find out what a broker paid for a bond, you can't determine the markup that the broker is charging. In addition, many brokerages vary their commissions based on the size of your order but don't advertise that fact. The only way to reveal whether a brokerage varies its commission is to enter a few prototype bond trades using the same bonds (without executing them, of course) to see how the price changes. However, $50 is a typical minimum markup—whether you buy one bond or several.
In addition to costly and hidden fees, different brokerages offer different bonds, so it's almost impossible to comparison shop. The best way to get a reasonable deal is to buy new-issue bonds. The TreasuryDirect online program (http://www.treasurydirect.gov) sells new-issue government bonds with no commissions, and you can sign up to receive emails alerting you to upcoming auctions.
2 See Also
For research, tools, and other information that can help you purchase the bonds you want, try some of the following web sites:
The Bureau of the Public Debt Online web site (http://www.publicdebt.treas.gov) is run by a unit of the Treasury Department and provides information about Treasury securities and U.S. Savings Bonds. It also hosts the Treasury Direct program described in this hack.