How to make money on bonds? The issue is relevant for many. After all, buying bonds is considered a profitable investment. However, the number of people who understand this topic is still small. It would seem that the question of how to make money on bonds should have a simple answer. Indeed, in fact, it is a security in which profit is already laid. But in practice, everything turns out to be somewhat more complicated. That's why novice investors need to carefully study the question of how to make money on bonds before investing.
goal
What are bonds for? It is important to answer this question in order to understand their essence. Where do those who plan to borrow money usually go? As a rule, to a banking organization.
Imagine that there is a company that needs money. She can also go to the bank. But he prefers an alternative option - to issue bonds, sell them, and in return receive money. At the same time, after a certain period of time, owners of securities can receive their money back with a certain profit.
Who issues bonds?
- Municipalities, that is, local authority.
- Corporations
- State.
Depending on who issued the bonds, they acquire the corresponding name. Beginning investors should pay attention to this in order to better understand the essence of the market.
Features
To better understand the essence of such an investment, you need to know the main characteristics:
- Nominal value. This characteristic is also called the word "face value". This is the amount that will be paid to the owner at the end of the repayment period.
- Market price. This characteristic is constantly changing. It indicates the amount at which you can purchase a bond at the current specific moment.
- Maturity. This is the period after which the owner will be able to exchange the previously purchased bond for its face value. Now you can understand how to make money fast on bonds. To do this, choose securities with a minimum repayment period.
- Coupon size. So called periodic payments to bondholders. Due to the regular receipt of coupons, the investor can receive passive income. The ideal option is to catch the moment when the refinancing rate is high. This will allow you to purchase long-term bonds and have consistently high coupon payments for several years.
- Yield to maturity. This is perhaps the most important characteristic. It depends on what profit an investor can expect upon maturity.
Having understood the above characteristics, every curious person will be able to understand how to make money on bonds.
What determines the profitability?
This is the most important question among those who are interested in how to make money on bonds.
The yield of bonds is highly dependent on the refinancing rate. The easiest way to explain and understand by example.
Suppose a refinancing rate is ten percent. If bonds offer a yield of five percent, buying such securities is not profitable. That is why they are sold with a return equal to or higher than the refinancing rate.
You need to understand that not all investors are waiting for the end of the repayment period. Some start selling bonds earlier. During the period of presence on the stock market, the price of a bond may change. It will be affected by the current refinancing rate. How does this happen?
Suppose the refinancing rate has halved. Moreover, previously purchased bonds will have a higher yield than current ones. However, this will entail an increase in their market price.
This rule applies in the opposite direction. If the refinancing rate increases, the cost at which the bonds are sold will decrease. No investor wants to own securities whose profitability has declined significantly.
Types of bonds
There is another important criterion that will allow you to dive deeper into the securities market. It also depends on how much you can earn on bonds. So, they are divided into interest and discount. You need to understand the difference before buying.
Discount bonds can be purchased cheaper than face value. At the end of the maturity, the owner of the security will receive income. It will be the difference between the face value and the purchase price. The higher it is, the more you will be able to earn on bonds.
The second variety is interest. Sold at face value or even higher. However, income will be paid to the owner regularly during the period until maturity.
You need to understand that during the ownership period, the price of a bond can change. Therefore, the owner has to decide whether to sell it or wait for the maturity period to end and take the face value. This is always a certain risk that discourages many novice investors.
Forecasts and analysis of the bond market
For many people, especially those far from the stock market, all this seems incredibly complex. They have a more pressing question: is it possible to earn on bonds?
You need to understand that the profitability of securities is affected by the reliability of the issuer.
If we talk about Russian government bonds, then their average yield is 10-11% per annum. Large companies such as Aeroflot, Russian Railways, etc. offer a more favorable rate. Investors can make a profit of 12-14% per year.
If the bonds are offered by a less well-known corporation, then the rate can reach 18%.
Despite the fact that high numbers cloud your mind, you need to understand that at the same time they involve high risks. If you pursue high profits, you can stay not only without it, but also without initial investments.
How to start making money on the stock exchange?
Stocks, bonds and other terms should be familiar to the potential investor. After all, the better he will understand the securities market, the higher the probability of making a profit. Moreover, skillful use of bonds allows you to create a reliable and stable source of income.
So, if everything is clear with attractive prospects, you need to consider a more pressing issue. How to start earning on bonds?
Many of them can be purchased on the Moscow Exchange. It is better for a private investor to act independently. This method is cheaper than the rest.
First of all, you need to find a broker who will provide access to the bond market. The next action will be bidding. You can conduct them yourself or entrust the broker, just giving him the appropriate order.
Starting amounts
It seems to many that to enter the bond market you need to own a lot of money. But this is not so. Often bonds have a face value of only a thousand rubles. You can buy only one security. This means that you do not need to own millions to start investing in bond purchases.
Having concluded a deal, you have to pay a commission to the exchange and broker. But it is usually not more than 0.1% of turnover. This once again proves that the stock market is accessible to most people who have even a little free money. This is enough to start. Of course, you won’t be able to get big profits in this way, but this will allow you to understand the stock market and see if this method of investing is right for you.
Beginner investors are often afraid to buy bonds, believing that bank deposits are safer, although they offer a lower percentage.