Typically, you’ll buy bonds (especially corporate bonds) in the secondary market (i.e. after it has been issued) through a broker. Note that some issues may be available through telephone trading only, although the majority of online brokers have online trading enabled for most issues.
For the actual process of buying bonds, please refer to our article “How to buy bonds?”
Unlike corporate bonds, some government bonds can also be easily bought by retail investors in the primary market. For example, if you live in the US, you can use TreasuryDirect to take part in Treasury auctions.
The system is run by the Bureau of the Fiscal Service under the US Treasury Department, a branch of the federal government. It's possible here to buy US savings bonds, Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Inflation-Protected Securities (TIPS) directly.
Similar schemes exist in other countries as well. For example, in Italy, BTPs (government securities indexed to the Italian inflation rate) can be purchased directly online at issuance, through any home banking system having an online trading feature. As for all other Italian government securities, BTPs can be also purchased at issuance at bank branches or at the post office.
If you want to diversify your investments, it’s also possible to get exposure to a basket of bonds by buying a bond ETF, or exchange-traded fund. The mechanics of buying an ETF is the same as buying a stock using your online brokerage account. Popular bond ETFs include the iShares 1-3 Year Treasury Bond ETF (SHY) and the iShares 20+ Year Treasury Bond ETF (TLT).
Bond ETFs have several pros and cons. For example, if you buy an individual bond and hold it to maturity, you’ll have an easily predictable cash flow, in the form of regular interest payments and the repayment of the principal upon maturity (unless the issuer defaults). By contrast, bond ETFs don’t have a fixed maturity, and how much you can sell your ETF for will depend on prevailing prices on the secondary market; something that’s more difficult to predict.
What else do you need to know about bonds?
Want to learn more before deciding what’s your optimal bond allocation? You might want to check out these other articles to deepen your knowledge.
- What is a bond? (our main article in the bond section)
- What is a bond yield?
- How do bonds work?
- What happens when a bond comes due?