Bonds are bought and sold in huge quantities in the U.S. and around the world. The way you buy and sell bonds often depends on the type bond you select.
Some bonds are easier to buy and sell than others—but that doesn’t stop investors from buying and selling all kinds of bonds virtually every second of every trading day.
The way you buy and sell bonds often depends on the type bond you select.
> Treasury and savings bonds may be bought and sold through an account at a brokerage firm, or by dealing directly with the U.S. government. New issues of Treasury bills, notes and bonds—including TIPS—can be bought through a brokerage firm, or directly from the government through auctions.
> Corporate and municipal bonds may be purchased, like stock, through brokers, as well as through investment and commercial banks. Once new-issue bonds have been priced and sold, they begin trading on the secondary market, where buying and selling is also handled by a broker. You will generally pay brokerage fees when buying or selling corporates and munis through a brokerage firm.
BUYING BONDS THROUGH A BROKER
You can buy virtually any type of bond or bond fund through a brokerage firm. Some firms specialize in buying and selling a specific type of bond, such as municipal bonds or junk bonds.
You should understand that your brokerage firm is being compensated for performing services for you. If the firm acts as agent, meaning it acts on your behalf to buy or sell a bond, you may be charged a commission. In most bond transactions, the firm acts as principal.
>>Example: It sells you a bond that the firm already owns. When a firm sells you a bond in a principal capacity, it may increase or mark up the price you pay over the price the firm paid to acquire the bond. The mark-up is the firm’s compensation. Similarly, if you sell a bond, the firm, when acting as a principal, may offer you a price that includes a mark-down from the price that it believes it can sell the bond to another dealer or another buyer. You should understand that the firm very likely has charged you a fee for its transaction services.
If the firm acts as agent, the fee will be transparent to you. The firm must disclose the amount of the commission you were charged in the confirmation of the transaction.
However, if the firm acts as principal, it is not required to disclose to you on the confirmation how much of the total price you paid to buy the security was the firm’s mark-up; it is only required to disclose the price at which it sold the bond to you and the yield.
Similarly, if you sell a security to a firm and it acts as principal, the firm is not required to tell you how much of a mark-down the firm incorporated in determining the price the firm would pay you. It is also possible to buy and sell bonds through an online broker, which often charges a flat fee to buy or sell a bond.
BUYING AND SELLING BOND FUNDS
Bond funds can be bought and sold through a broker or other investment professional, or through the fund directly. Keep in mind that if you work with a broker, the choice of bond funds is limited to those the brokerage firm allows its professionals to sell.
As with other mutual funds, when you buy shares of a bond fund, you pay the fund’s current net asset value (NAV) per share plus any fee the fund or broker assesses at the time of purchase. This may include a sales load or other type of purchase fee. When you sell your shares, the fund will pay you the NAV minus any fee the fund or investment professional charges at the time of sale, such as a back-end sales load or redemption fee. Most funds have a Web site that can provide information about the fund and the net asset value (NAV) of a fund’s shares, as well as the ability to request or download a prospectus.
When you purchase an individual bond at face value and hold it to maturity, there is no capital gain to be taxed. Of course, if you sell the bond for a profit before it matures, you’ll likely generate a taxable gain, even if it’s a tax-exempt bond. If you owned the bond for more than a year, your gain is taxed at the long-term capital gain rate. If you owned the bond for one year or less, you are taxed at the short-term rate.
With a bond fund, you are unlikely to sell at the exact share price at which you bought, which means you incur a capital gain or loss. In addition, mutual fund managers buy and sell securities all year long, incurring capital gains and losses. If the gains are more than the losses, shareholders will receive a capital gain disbursement at the end of the year.