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Rookie Bond Investors

You’re a Rookie Bond Investor if you have little or no direct participation in the bond market. (Many rookies do have extensive holdings in bonds, but they were selected for you by an advisor or full-service broker.) You likely have fairly conservative objectives for the capital you’re investing in bonds, so you are probably averse to putting that principal at risk.

Most beginning fixed-income investors will have placed only a handful bond trades over the course of their investing careers. As a rookie, you may have heard about using bonds as part of an asset allocation plan, but not really understand how that works (or why it’s so important to think through). Rookie Bond Investors are aware that prevailing interest rates are significant, but may not be as attentive to its implications as they should. You may also not understand the true magnitude of the Fed or how interest rates impact the bond market as a whole.

As a bonds rookie, you may need some extra help in understanding the different yield quotes for yield to maturity, yield to call, yield to put, or yield to worst. Bond beginners tend to buy a bond and hold it until maturity, unless you have a sudden need for cash which leads you to sell the position. Rookies may not be aware that it’s possible to incur a capital loss if selling the bond prior to maturity.

As a Rookie Bond Investor, here are the basics you should master:

  • Understand bond prices are a percentage of par (e.g. $102.125 equals $1021.25 per bond)
  • The components of a bond quote (yield, size, minimum order, offering price)
  • The basics of investing in bonds
  • Order entry terminology (bid wanted, submit offer)
  • What a coupon payment is and how it works
  • Understand the difference between the effective yield compared to the stated coupon rate
  • How to interpret bond issuers’ credit ratings
  • Basic portfolio allocation percentages
  • How to choose among short-, intermediate- or long-term maturity dates based on your investing goals
  • Be aware of call or put dates for any potential bond investments
  • Basic information regarding the bond issuer (municipality, corporation, or Treasury, etc.)
  • The potential tax advantages of bond investing
  • Understand how selling before maturity affects your return

Rookie Bond Investors can improve their skills by:

  • Using TradeKing’s Bond Finder for investment opportunities
  • Reviewing bond strategies geared to the rookie skill level
  • Monitoring when the Fed is scheduled to meet and the outcome of Fed meetings
  • Anticipating and planning for all possible outcomes for your investments, not just the positive scenarios
  • Staying cautious if buying or selling a bond when a Fed announcement is pending
  • Keeping liquidity in mind before making bond investments
  • Understanding how commissions and fees impact your bottom line
  • Learning about basic laddering
  • Placing coupon payments in a savings account for future annual bond investments
  • Engaging members of the Trader Network to help you work through investing ideas
  • Inquiring members of the Trader Network to explain their investing analysis
  • Attending or watching TradeKing’s free educational webinars, geared to the veteran skill level

Rookie Bond Investors should steer clear of the following:

  • Resist the urge to invest in junk bonds with promises of high yields
  • Do not invest in any bond if you do not completely understand its features or tax implications

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