If we buy stocks, we need a stock broker; if we buy bonds, we need a bond broker. A bond broker is the one who makes transactions over-the-counter on behalf of investors. They are the intermediaries between investors and sellers and during this process, they can earn considerable commission. Investors need a bond broker unless they choose to purchase government bonds. Although bond brokers make it convenient for investors, purchasing bonds through brokers will lack transparency since the cost and size of transaction are hidden and brokers may take advantages of investors by charging excessive commission.
How to find a proper bond broker?
To find a proper bond broker, investors should first figure out whether they need a bond broker or not. If they wish to purchase municipal or corporate bonds, a bond broker is required. If they wish to purchases government bonds, they are free to do that themselves.
After that, investors should choose between full-service brokers and “supermarket agents”. The former one will make an actual bond selection for them while the latter one is usually cheaper. Investors can search on Fidelity, T. Rowe Price, or Vanguard for more information.
No matter which kind investors choose, they should always do the following things.
- Finding someone who specializes in bonds and keeps tracks on market.
- Being on alert with your broker’s transactions and required commission.
- Checking dealer’s numbers to increase trade’s transparency. Investors should be familiar with Securities Industry and Financial Markets Association and Financial Industry Regulatory Authority and check for more information.
How to buy bonds?
- Municipal bonds & Corporate bonds
Investors need a bond broker if they want to purchases municipal or corporate bonds. They can either buy them from a full-service broker or a discount broker. Normally, bond brokers require commission which ranges from 0.5% to 2%. If investors find their trade is free of commission, they should be aware that the commission fee is added to the price. Since the trading process is lack of transparency, investors need to use the Trade Reporting and Compliance Engine to check the latest price in secondary market.
- Government bonds
Investors can purchase government bonds directly from financial institutions or government through their regular investment accounts. In U.S., investors can purchase bonds from TreasuryDirect, but they must have social security number, taxpayer identification number, U.S. address and a U.S. bank account to complete the transaction.
- Bond funds
Bond funds are a portfolio of bonds with low-cost. These bond funds are only traded in secondary market and investors do not know the exact maturity date of their portfolio since the bonds within it are changing all the time. To purchases bond funds, investors should pay additional fees to portfolio managers.