About Bond Trading bonds can seem a bit difficult compare to stocks, because there's no central exchange for trading bonds. Still, once you learn what you're doing, trading bonds becomes a lot easier. To start, you need a brokerage account. It's your choice whether you go with a full-service broker or an online trading account. Possibly your own level of experience may help you to make that choice. Make sure you understand what the account requires you to do in order to place an order. You don't want to find yourself needing to place an order but unable to do so because you're traveling and don't have internet access, as an example. Bonds have a purchase price, a sale price, and also an interest rate. If you purchase one, you (as the bondholder) are entitled to payment of the principal when the bond matures, as well as interest payments twice a year. In the same way as stocks, the prices of bonds vary. When a bond is first issue, its initial price and interest rate are set. From then on, the market dictates what they're worth, and whether it's higher or lower than it was when issued. General market interest rates have a major impact on the movement of bond prices. If the interest rates on bank loans, real estate mortgages, and savings accounts drop after the issue of the bond, then the bond's price will tend to rise. This isn't had to understand. If you're holding a bond that was issued that pays at an interest rate of 7%, and cash deposits drop to a return of 6%, then naturally your bond will be worth more and its price will rise. Basically, your bond pays more in interest than a competing investment. As to how much they're likely to rise, well, that's a lot more complex, and certainly outside the scope of this article. A common expression in bonds trading is 'over 100', which means that a bond is trading at a premium to its issue price, and bonds that are 'under 10' are trading at a discount. The 100 refers to 100%, where 100% is the initial price. Like all investments, bonds have a risk factor. If a company goes bankrupt, bondholders do take priority over shareholders when it comes to paying out creditors, but if there's no money available anyway, your place in the queue is basically irrelevant. A lot of bonds are fairly low risk, as generally it's expected that you'd at least receive your money back in a crisis, but the lower the risk, generally the lower the return on the bonds. To help you assess which bonds are best for you, it's worth taking a look at the bonds ratings issued by Standard and Poor (S&P) or Moody. These companies analyze bonds using very complex, technical formulas, in order to produce a simple sliding scale valuation of bonds. You can go from the very low risk or AAA rated bonds, right through to the CCC bonds, which are very high risk and are often referred to as junk bonds. Make sure you do your homework before buying bonds - check out the company, including earnings projections, possible legal issues, levels of debt and so on. Basically, you're going to be granting that company a loan, and like all lenders, you want to feel confident that the interest will be paid on time, and that the company will be able to repay the loan in full at the agreed time. Bad Ian Fleming reference aside, the prime function of a bond is that you're lending money to a corporation for a fixed term, and getting a fixed rate of return, called the coupon rate, based on the original capital invested, out of it. The trick is figuring out how much of your investment portfolio should be in bonds versus other investment vehicles. The principle advantage of bonds is that they're rated in their risks. The bond has a term where it pays off (say 10 years) at which point you get your initial investment back. Bonds will pay a steady income of whatever their return rate is, taken as a percentage of the initial investment. Thus, if you invest $100 000 in a series of bonds that return interest at a coupon rate of 3.5%, each year, you'll get $3 500 of interest income. The big advantage of bonds is their steady income stream, and that you get the initial investment back when you're done. Sounds simple, right? Here's where it gets a bit more complicated, but, more profitable. The key is in establishing what is the best strategy when it comes to investing in bonds. The answer of course, is it depends! What types of bonds are you looking at buying? Short term (which are less than 5 years in length of term) usually have a low coupon rate, however, your investment isn't tied up for a longer duration. This may prove helpful if there is a chance that you may need access to your funds in the case of an emergency, as odds are, you will have a bond maturing around the time you'll need it most. Medium bonds can tie up your money for 5-10 years, while long term bonds can enjoy a term of 10-30 years. The coupon rate will also vary depending on the credit worthiness. A lower credit rating often means a higher coupon rate (to match the higher risk involved), while a high credit rating is rewarded with a lower coupon rate (and less volatility and risk). While the coupon rate is the most understand concept in bond investing, its not necessarily where all the money is made. Remember, people buy and sell bonds well before their maturity date. As such, when the interest rate moves lower, the price of an existing bond moves higher, thanks to its higher rate of return than a newer bond would provide. On the flip side, if interest rates move higher, the bond price moves lower, simply because new bonds will now provide a higher rate of return than your existing ones. If you make the call on the direction of interest rates correctly, you'll find yourself in the money by a few percentage points. That can make a huge difference in your portfolio. The last element of bond investing to look at is the yield of the bond. While its more involved, it is simple to calculate. The yield rate is calculated as the ratio of the annual return of the coupon rate, divided by the current purchase price of the bond. Wow. How about an example: remember our $100 000 bond that was paying us $4000 a year, which gives us a yield of 4%. That of course is presuming its been bought at $100 000. What if it were purchased at $90 000 (due to an increase in the interest rate)? It would still return $4000 per year, however, the yield would be 4.44% ($4 000 / $90 000). Just as the purchase price varies inversely with the interest rates, so will the yield. resource