There are two popular ways to invest in bonds:
- You can buy bonds for one company or government directly
- You can buy a collection of bonds through a mutual fund or ETF (exchange traded fund)
Bonds can be bought and sold just like stocks and the price of a bond, like stocks, is based on supply and demand. But bonds are traditionally viewed as less risky investments than stocks, but this also means that interest, since it’s fixed, will also be less than stocks. However, some bond investments are riskier than others and in some cases even more risky than stocks. Bonds are rated depending on the level of risk a company has of potentially default on their loan.
The ratings are based on a company’s creditworthiness. The lower the rating, the higher the risk, typically the higher the fixed interest rate. The two most popular Bond rating agencies are Moody’s and Standard & Poor’s. I only recommend investing in investment grade bonds, any bond below are called “junk bonds” for a reason.
However, you’ll likely never need to buy bonds directly since both the transaction fees can be costly and just like you shouldn’t put much of your money in individual stocks because there is too much risk putting your money into one investment.
It’s a lot easier to buy bonds in what are known as mutual funds or ETFs, which hold a collection of bonds – organize by rating or type, or some other criteria, which will help you diversify your risk. You can also easily buy municipal, government, and corporate bond mutual funds and ETFs online.