Corporate bonds are debt securities issued by companies to raise capital. Investors who purchase a corporate bond are essentially loaning money to the issuing company. In return for their investment, the investor will receive periodic interest payments (known as coupons) and the return on their principal investment when the bond reaches maturity. Investors looking to purchase corporate bonds in the UK have a few options.
Corporate bonds are typically traded on secondary markets like the London Stock Exchange. However, some bonds may not be listed on an exchange and can only be traded over-the-counter (OTC).
Research the company
Before investing in any company, it is essential to do your research. It includes looking into the financial stability of the company as well as its credit rating. You can find this information by checking annual reports, reading financial news articles, and searching for the company on websites like Google Finance or Yahoo Finance. It is also a good idea to consult with a financial advisor to get a professional opinion on whether or not investing in a particular company is a good idea.
Determine the type of bond you want to purchase
There are two primary corporate bond types: investment-grade and junk bonds. Investment-grade bonds are issued by companies with high credit ratings and are considered less risky than junk bonds. On the other hand, Junk bonds are issued by companies with lower credit ratings and are riskier.
Choose a broker
After deciding on a company, you would like to invest in, and what type of bond you would like to purchase, you will need to choose a broker. A broker is an individual or firm that buys and sells securities on behalf of investors. When choosing a broker, you should consider commissions, fees, and account minimums.
Place an order
After choosing a broker, you will need to place an order. You can do this by calling your broker or placing an order online. When placing an order, you will need to specify the type of bond you want to purchase and the quantity.
Once your order has been placed, the trade will take two business days to settle. Your broker will receive your bond on the second business day after executing your trade.
Hold or sell
Once you have purchased a corporate bond, you can hold onto it until it matures or sells it on the secondary market. If you sell the bond before it matures, you may make a profit or a loss depending on the price at which you sell it.
Benefits of investing in corporate bonds
Regular income payments
One of the main benefits of bonds investing is that they offer regular income payments. It can be helpful for investors looking to supplement their income or those who are retired and living on a fixed income.
Potential for capital growth
Another benefit of investing in corporate bonds is the potential for capital growth. It means that if you sell your bond after it has increased in value, you may be able to make a profit.
Investing in corporate bonds can also help diversify your portfolio because bonds tend to perform differently than stocks, so they can help balance out any losses you might experience with your other investments.
Corporate bonds are considered a safe investment because companies issue them with solid credit ratings. It means that there is less risk that you will lose your money if the company defaults on their payments.
Risks of investing in corporate bonds
Interest rate risk
Interest rate risk is one of the principal risks of investing in corporate bonds. If the interest rate rises, the value of your bonds will go down because when interest rates go up, investors are more likely to sell their bonds to invest in other things that will give them a higher return.
Another risk of investing in corporate bonds is default risk. Therefore, there is a chance the company will not be able to make their payments, and you will lose your money. It is why it is vital to research a company before you invest in its bonds.