How To Trade Bonds

Richard Montana | November 1, 2022

A bond is a financial instrument that works by allowing individuals to loan cash to institutions such as governments or companies. The institution will pay a defined interest rate on the investment for the duration of the bond, and then give the original sum back at the end of the loan’s term.

As bonds are ‘negotiable securities’, they can be bought and sold in the secondary market. This means that investors can earn a profit if the asset appreciates in value, or cut a loss if a bond they sell has depreciated. Because a bond is a debt instrument, its price is highly dependent on interest rates.

Bond trading is one way of speculating on the price fluctuations in the value of corporate or government bonds. Many traders and investors see it as an essential part of a diversified trading portfolio, alongside stocks and cash.

Here you will find an easy to understand explanation of bonds trading. This includes how to trade bonds online, what you need to trade bonds and how to open a trading account with a broker so that you can start trading bonds online today.

Maybe you have heard of bonds trading online or through a friend. Perhaps you are looking to trade and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to trade bonds can help you along your journey.

Bonds Trading Guide

What are Bonds?

When companies or some other entities including governments need to raise funds for new projects, ongoing operations, or refinance existing debts, they may choose to issue bonds directly to investors as a way to get the capital. It is common for many corporate and government bonds to be publicly traded on exchanges.

When you buy a government bond, you are effectively loaning your capital to whichever government issued the bond. Corporate bonds work in the same way, but you are instead loaning your capital to a company. Corporate bonds are usually considered to be riskier due to the increased possibility of a company having to default on its loans.

For some people, a government bond presents itself as a more long-term investment opportunity, offering steady returns with low risk. However, the inverse relationship that occurs between bonds and interest rates along with other factors that affect bond prices, can also make them a potential trading instrument of choice for active day traders.

How does Bonds Trading Work?

First and foremost, it is important to distinguish the differences between trading bonds and investing in them.

Trading bonds

Trading bonds is when a trader speculates on bond price movements over the short and medium term. In a nutshell, they will buy a bond if they think its price will rise, or sell if they think it will fall. This way they are looking to profit from the movements in bond prices.

There are many brokers who provide bonds trading with leverage. Leverage involves borrowing a certain amount of the money needed to invest in something. This is done in order to control a larger position size.

For example, if you had an account size of $1,000 and leverage of 1:3, you would be able to take a position size of $3,000. Now, whilst this can be tempting, it is also very dangerous. Leveraged trading greatly increases risk and potential loss. It is important to have a clear understand of leverage and how it works before even considering it.

Investing in bonds

This type of investing is when an investor will look to hold government bonds over the long term. They buy bonds and carry the risk of losing out if bond prices fall but can profit from regular interest payments and a bond yield (return to investor at maturity). This type of investment requires the full amount upfront and a bond broker.

Where to Trade Bonds?

Many online brokers provide bonds trading and investing. You can see a selection of our best brokers below with whom you can open a trading account to trade online with.

Broker
Rating
Regulated
Min. Deposit
Founded
Max. Leverage
1.
AvaTrade Review

ADGM FRSA, ASIC, BVIFSC, CBI, FFAJ, FSCA, IIROC, JFSA

$100

2006

1:400

Between 74-89% of retail investor accounts lose money when trading CFDs with this provider.
2.
IG Review

ASIC, BaFin, CFTC, DFSA, FCA, FINMA, FMA, FSA, FSCA, JFSA, MAFF, MAS, METI, NFA

$250

1974

1:200

Between 74-89% of retail investor accounts lose money when trading CFDs with this provider.
3.
IC Markets Review

ASIC, CySEC, FSA, SCB

$200

2007

1:500

Between 74-89% of retail investor accounts lose money when trading CFDs with this provider.
4.
Pepperstone Review

ASIC, BaFin, CMA, CySEC, DFSA, FCA, SCB

$200

2010

1:400

Between 74-89% of retail investor accounts lose money when trading CFDs with this provider.
5.
XM Group Review

ASIC, CySEC, DFSA, IFSC

$5

2009

1:888

Between 74-89% of retail investor accounts lose money when trading CFDs with this provider.

Why Trade Bonds?

Investors may choose to trade bonds for a number of reasons, with some of the key reasons being to try and make a profit, for protection and a way to diversify a trading portfolio. It is imperative that a trader has a clear understanding of what bonds are and why or why not they should trade them.

  • Yield: One of the most common reasons for investors to trade bonds is for them to try and increase the yield on their investment portfolios. In this instance, yield refers to the total return that they may expect to receive if they were to hold a bond to maturity. This is an aspect most investors will try to maximise as much as possible.
  • Credit-Upgrade Trade: This involves an investor trading bonds to try and take advantage of potential swings in credit ratings. An upgrade by a well-known credit rating agency reflects its opinion that the company has become less risky, and its financial position and business prospects have improved. This may in turn cause the price of the bond to increase whilst the yield decreases.
  • Credit-Defense Trades: On the contrary, a trader may consider a credit-defense trade if they believe that there are signs that a certain industry will become less profitable in the future. As the name suggests, this is a more defensive position where an investor may look to pull funds out of sectors that are expected to do poorly, or those that have the most uncertainty.
  • Sector-Rotation Trades: This involves seeking to re-allocate capital to sectors that are expected to outperform relative to an industry or another sector.
  • Yield Curve Adjustments: The yield curve adjustment trade involves an investor changing the duration of their bond portfolio in order to try and gain increased or decreased sensitivity to interest rates, depending on their view of the direction of interest rates. High-duration bonds tend to have a higher sensitivity to changes in interest rates, in contrary to low-duration bonds.

How to Trade Bonds Online?

If you have taken the time to read through the above, you should hopefully have an understanding of how to trade bonds. Here is a summary of the key steps:

1. Decide if bonds trading is for you

Trading bonds online carries an element of risk and can take more time than other forms of investing. You will need to research bonds, manage your trades, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading online.

2. Educate yourself

Before trading bonds, it is imperative to learn as much as possible about investing and bonds in particular. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online brokers that can help you to improve your trading skills and knowledge.

Most bond brokerages will also provide a free demo trading account so that you can practice trading bonds online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.

3. Choose a bonds broker

In order to trade bonds online, you will need a broker account to execute your trade positions through to the markets using a trading platform or trading app. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.

If you are looking for a broker that provides a specific market or trading instrument, we have compiled some handy guides for Forex, Commodities, Cryptocurrency, Stocks, Indices, Options, ETFs, CFDs and Futures. If you are looking to save as much as possible on your trading costs, you can take a look at our best discount brokers. If you are new to trading and need as much guidance as possible, you might want to explore our best brokers for beginners. If you don’t have the time or skills to trade and want to copy trading signals, you could look for a social trading platform.

4. Research bonds

If you have made it this far then you may be ready to start trading bonds online! The next step is to research the different bonds to discover which of them you have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter bonds according to various criteria in order to narrow down your search if need be.

Many traders will begin by analysing different companies, studying public information such as finances, earnings and reports from professional analysts. The best brokers should have this information conveniently displayed for you within their trading platform.

5. Have a bonds trading plan

Some of the most important factors that can help determine bonds trading performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.

6. Buy and sell bonds

Once you know what bonds you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a bonds trade, you will need to keep track of how it performs and manage it according to your trading plan. Some investors will keep hold of bonds for the long-term, whereas traders may buy and sell bonds on a more frequent basis.

Conclusion

Bonds trading can be a way to take advantage of the inverse relationship between long-term interest rates and bond prices.

However, it is important to understand the significant risks involved with trading bonds online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.

This can be a useful way to familiarise yourself with how to trade bonds and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most trading brokers provide unlimited demo accounts free of charge.

Take your time to research brokers and do your own due diligence, the above information is only for educational purposes and not advice. Please feel free to browse our broker ratings and broker reviews if you are looking for some more inspiration before you get started. You can also compare brokers using our handy free comparison tool.

About the Author

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Richard Montana
Richard has many years of experience in broker research, testing, analysis and reviews. He knows what to look for through years of trading himself with different brokers and listening to the feedback of others.

Review Methodology

For all of our broker reviews, we research, validate, analyse and compare what we deem to be the most important factors to consider when choosing a broker. This includes pros, cons and an overall rating based on our findings. We aim to help you find the best broker according to your own needs. You can read more about our review process.


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