Where and How to Buy Corporate Bonds Online

Corporate bonds allow individuals to lend money directly to companies. In exchange, the company pays regular interest and returns the principal on a specified maturity date, providing a predictable income stream.

Companies issue corporate bonds to raise capital for various business activities, such as funding new equipment, research and development, or refinancing existing debt. Unlike stocks, which represent ownership, corporate bonds do not grant equity. The investor’s return is based on agreed-upon interest payments and principal repayment, regardless of the company’s stock performance.

Online Platforms for Corporate Bonds

Individual investors can purchase corporate bonds through various online platforms, including full-service and discount brokerage firms. Understanding the differences among these platforms is important for selecting a suitable venue.

Full-service brokerage firms offer comprehensive financial advice and a wide range of investment products, including corporate bonds. These firms typically provide personalized guidance, research reports, and access to both new bond issues and the secondary market. Their services often come with higher fees, which can include commissions or markups on bond trades.

Discount brokerage firms cater to self-directed investors who prefer to manage their own portfolios. These platforms provide access to a vast selection of corporate bonds, primarily in the secondary market, and sometimes new issues. They are generally known for lower trading costs, often charging smaller commissions or incorporating markups within the bond’s price. Many established online brokers, such as Fidelity, Charles Schwab, and ETRADE, operate as discount brokerages with extensive bond listings.

Most corporate bond trading for individual investors occurs on the secondary, or over-the-counter (OTC), market, facilitated by brokerage platforms. Investors typically buy bonds from other investors rather than directly from the issuing company. The secondary market offers a broader and more liquid selection of bonds, and online platforms enhance transparency and efficiency.

Preparing to Buy Corporate Bonds

Before purchasing corporate bonds online, investors should undertake several preparatory steps. This involves understanding account requirements, bond characteristics, and credit ratings. Thorough groundwork helps align investment choices with financial goals and risk tolerance.

The first step involves opening and funding a brokerage account, which serves as the gateway to purchasing corporate bonds online. Most reputable online brokerage firms require applicants to be at least 18 years old, possess a valid Social Security Number, and have a U.S. address. The account opening process typically involves submitting an application, providing identification documents, and linking a bank account for funding purposes.

Once the account is established, understanding basic corporate bond characteristics becomes paramount. A bond’s par value, often $1,000, represents the principal amount repaid at maturity. The coupon rate is the annual interest rate paid by the issuer, usually distributed semi-annually. The maturity date signifies when the principal will be returned to the investor.

Some corporate bonds may include call features, which grant the issuer the right to redeem the bond before its stated maturity date. This can occur if interest rates decline, allowing the company to refinance its debt at a lower cost. Investors should also be aware of original issue discount (OID) bonds, which are sold at a price lower than their par value and do not make periodic interest payments, with the interest accruing and paid at maturity.

Understanding credit ratings is important, as they assess an issuer’s ability to meet financial obligations. Independent rating agencies, such as Moody’s, Standard & Poor’s (S&P), and Fitch, assign letter grades to bonds based on their creditworthiness. Bonds rated BBB- or Baa3 and higher are considered “investment grade,” indicating a lower risk of default. Bonds rated below this threshold are often termed “high-yield” or “junk bonds” and carry a higher risk but potentially offer higher interest rates to compensate investors. Investors should review an issuer’s credit ratings and financial statements to assess risk.

Steps to Purchase Corporate Bonds Online

Once an investor has selected an online platform and completed preparatory research, the process of purchasing corporate bonds involves navigating the platform’s interface and executing trades. This typically begins with locating the bond trading section, often labeled “Fixed Income” or “Bond Center” on brokerage websites.

Within the bond trading section, investors can usually search for specific corporate bonds using various criteria. Common search filters include the bond’s CUSIP number (a unique identifier), the issuer’s name, maturity date ranges, and credit rating. This allows investors to narrow down the thousands of available bonds to those that meet their specific investment objectives and risk parameters.

After identifying a bond of interest, the next step involves understanding the bond quote, which displays the current bid and ask prices. The bid price is what buyers are willing to pay, and the ask price is what sellers are willing to accept. The difference between these two prices, known as the bid-ask spread, represents the market maker’s compensation. Bond prices are typically quoted as a percentage of their par value, such as 95 for $950 or 102 for $1,020, for a $1,000 par value bond.

When placing an order, investors generally have the option of a market order or a limit order. A market order instructs the broker to execute the trade immediately at the best available price. For corporate bonds, which can sometimes have lower liquidity than stocks, a limit order is often preferred. A limit order allows the investor to specify the maximum price they are willing to pay or the minimum price they are willing to receive, providing greater control over the execution price.

Upon placing an order, the investor will receive a trade confirmation detailing the transaction, including the bond’s CUSIP, par value, price, and settlement date. Funds are debited from the investor’s account at settlement, and bond ownership is recorded.