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Bond Market Trading for Beginners

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Learning Bond Market Trading

Bond Market Trading

Bond market trading is a multi-trillion dollar operation that attracts a very broad spectrum of investors. For those who purchase and hold bonds to term, the market is secure and stable. Bonds are commonly given as gifts, particularly for children. Those who buy and sell bonds before maturity dates, however, are exposed to different range of risks.

Basics of Bond Market Trading

Bond market trading involves the trading of bonds prior to their maturity date. The value is contingent upon changing interest rates. As rates climb, older bonds fall in value, due to the higher rates of newly issued ones. When interest rates fall, however, the value of existing bonds rises. Investors study a range of economic indicators to determine where they believe interest rates will head, and how best to handle their bond trading.

The bond market in the United States is comprised primarily of corporate, mortgage, municipal, and government bonds. You can also invest in agency and asset backed bonds. These bonds are not traded like stocks on an open market. Instead, they are bought and sold through bond dealers.

 Bond Terminology

If you are interested in becoming involved in bond market trading, you should be familiar with a few terms. A coupon refers to the percentage of interest to be paid on a bond during a year. The maturity date is the date at which the bond will be paid off. A bid is the price that a trader may be willing to pay for a bond, while the offer is the price that a trader is willing to sell a bond. The bid-offer spread is the difference between these figures.

Becoming involved in bond trading requires different knowledge and a different skill set than typical stock market trading. As in any investment, it is important to know your risks, and hedge properly against them through appropriate means. Bond market trading can be quite lucrative, once you learn how it works.

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