Whether you're interested in investing in bonds because you've heard it's a sensible way to grow your wealth or just got lucky spinning the bottle, purchasing bonds is a smart and relatively safe move. There are all sorts of reasons to invest in bonds.
But no matter why you want to invest in bonds, it won't do you much good if you don't actually know how to make money with bonds. Luckily, we're here to help you. So continue reading and we'll walk you through everything you need to know about making money with bonds.
How Bonds Work
When you buy a treasury bond, you're basically giving a loan to the government. Over a specific amount of time, the government will pay you interest for that loan. Because bonds are backed by the full faith and credit of the United States government, most people consider bonds to be a pretty secure investment.
As an example, let's say you purchase a 10-year bond for $20,000 that pays 2% interest. This means that the issuer will pay you interest on that $20,000 every six months for the next ten years. Once the ten years are up, you'll also get your $20,000 back.
How to Make Money With Bonds
There are essentially two ways to make money from bonds. The first method is to hold the bonds until it reaches the maturity date and you simply collect the interest payments. You usually receive your bond interest payments twice a year.
There is another way to make money from bonds, however. You can actually make money by selling the bonds at a price higher than you bought it. This is a similar method to buying and selling stocks.
You can, in theory, purchase bonds for a value of $20,000 and then sell the bonds for a higher price like $22,00 and net a $2,000 profit.
How to Buy Bonds
So how exactly do you buy bonds? Bonds aren't like stocks where you can simply open a brokerage account and buy or sell them on an exchange. Treasury bonds can be purchased directly from the US government.
You can also purchase bonds from brokers. The difficulty with buying bonds is that it's difficult to compare prices. Thankfully, FINRA (the Financial Industry Regulatory Authority) is able to somewhat regulate the bond market.
They do this by uploading the prices of transactions. However, there can be a lag between the actual price and what FINRA posts.
The Importance of Knowing How to Make Money With Bonds
Bonds aren't seen as cool or sexy like stocks are. But they are an important part of any diversified portfolio and help protect your exposure to risk. And by knowing how to make money with bonds, you can increase your ability to profit as well.
If you're interested in getting started in investing, make sure to check out our beginner's guide and the rest of our site for helpful advice and cool gift ideas as well!