How to Trade Bonds

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When the bonds are issued, one can also trade such bonds in secondary markets or on exchanges without the direct involvement from the issuer. Trading bonds is quite difficult compared to stock trading because in bond trading, there is no central exchange that can facilitate the trade process. However, there are few basic steps that may facilitate the process…

Step 1

Open a brokerage account - The first that you should do is to open a brokerage account which can be through an online trade account or through a full time service broker. A broker can purchase and trade bonds on an over the counter (OTC) market or through indexes such as the NASD and the NASDAQ. One of the most important things to consider here is to know the type of account and look at what are required from you in order to make your order such as an Internet access.

Step 2

Know the price (both the purchase price and the sale price) of the bond and the interest rate - The prices of bonds that are traded vary. Usually, the initial price of the bonds as well as the rate of their interest is determined on its first issue. After which, it is the market that determines their price and their interest which depends on the flow of the market. The prices and interest of the bonds may rise and fall based on the general market interest rates. When you trade your bonds, it is important to know that the price of the bonds tend to increase, when after their issue there is a fall on the interest rates of savings, mortgages on real estates, and loans on banks.

Step 3

Select your sell order type - At this point it is important to select a type of sell order that would serve as a guide to your broker on how to trade your bonds. This requires you to decide whether your broker can trade unlimited amounts or limit up to a certain price in which the broker can sell the bonds. If you want your broker to sell at a specific time frame or allow your broker to perform cancellation of all orders and consequent trades, then you can opt for an all-or-kill (AOK) order. If you want your broker to sell the bonds entirely as a package, then opt for an all-or-none (AON) order.

Step 4

Try to familiarize yourself with the terminologies of bond trading - In bond trading, there are a number of terms that you should be familiar with. A few of these are the terms ‘over 100’ and ‘under 10’. By ‘over 100’ trade, it means that the bond is traded at a premium price to its issue price while by ‘under 10’ it means that the bond is traded at a discount.

Step 5

Determine and set the time frame for your trade transaction - You have to stipulate when the cash transaction should occur whether it should be on a regular 3 days or delayed to 60 days.

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