Getting Started With Bond Purchases: A Complete Guide

If you’re wondering how to buy bonds, you’re taking an important step toward building a diversified investment portfolio. Fixed-income securities play a crucial role in balancing growth assets like stocks. The bond-buying process can seem complicated at first glance, but breaking it down into manageable steps makes it accessible to investors of all experience levels. Understanding your options—from direct individual purchases to pooled investment vehicles—will help you make informed decisions about adding fixed-income exposure to your portfolio.

Understanding Fixed-Income Securities

Why should bonds matter to your investment strategy? Fixed-income instruments deliver steady cash flow that makes them particularly attractive for investors seeking reliable income alongside capital preservation. A thoughtfully constructed portfolio combining stocks and bonds can deliver more predictable returns with lower volatility than equities alone, while offering yields that exceed money market accounts.

Even in low-interest-rate environments, investors have options. High-yield debt, emerging market bonds, and other alternative fixed-income products can help meet income requirements, though they come with elevated risk profiles. According to investment professionals, “The purpose of fixed-income investments is to add diversification to a portfolio. When equities face downward pressure, bonds often move in different directions, which helps investors experience less severe portfolio swings.”

The key insight: A balanced allocation between stocks and bonds creates a stabilizing effect. During market volatility, your fixed-income holdings can cushion the impact of stock market declines while you benefit from long-term growth potential.

Purchasing Individual Bonds Directly

Buying individual bonds offers investors significant control. You can acquire bonds through brokers or directly from government entities, depending on the bond type. One major advantage of individual bond purchases is the ability to lock in a specific yield for a defined period. This differs markedly from bond mutual funds or ETFs, where yields fluctuate as the fund’s holdings change.

An important practical detail: Individual bonds must be purchased in whole units. Most bonds come in $1,000 increments, so you’ll need that minimum deposit in your brokerage account. U.S. Treasury securities are slightly different—they carry a $1,000 face value but have a $100 minimum bid with $100 purchase increments.

Treasury bonds are available through two main channels: traditional brokerages or the official Treasury Direct platform. Whether you’re exploring municipal bonds, corporate obligations, or government securities, the purchasing mechanics follow similar principles. You can pursue new issues (primary market purchases) or seek established bonds in the secondary market.

New Issue Bonds: Primary Market Opportunities

Buying new issue bonds means participating in the primary market—essentially purchasing at the offering stage, similar to buying an IPO. Let’s examine each type:

Corporate Bonds as New Issues

Acquiring new corporate bonds as an individual investor requires establishing relationships with investment banks or brokerage firms managing the offering. You’ll need to evaluate several factors: credit rating (whether investment-grade or speculative), maturity timeline (short, medium, or long-term), interest structure (fixed or floating rates), and coupon payment frequency. Your brokerage account must contain sufficient funds to cover both the purchase price and any associated commissions.

Municipal Bonds as New Issues

Purchasing new municipal bonds involves participating in the issuer’s retail offering period. You’ll establish an account with the sponsoring financial institution and submit an order specifying desired quantity, coupon, and maturity date. The bond prospectus provided to prospective investors lists available coupon rates and maturity options.

Government Bonds as New Issues

Treasury bonds can be purchased through brokers or Treasury Direct. Treasury auctions occur multiple times annually, accepting both competitive and non-competitive bids. With non-competitive bids, you accept the auction-determined terms. Competitive bidding allows you to specify your preferred yield or discount rate. Online resources track upcoming auction schedules.

Secondary Market Bonds: Established Opportunities

Many bondholders sell holdings before maturity, creating a robust secondary market. You can purchase all bond categories through this market via brokerages, specialty bond dealers, or public exchanges. However, secondary market transactions require more research than new issues.

Pricing transparency differs significantly. New issue purchases involve uniform pricing for all buyers. Secondary market bonds, particularly corporate and municipal securities, often carry dealer markups. Two different dealers might quote different prices for the identical bond. Transaction costs including commissions, fees, and spreads apply.

Research Tools for Secondary Purchases

For municipal bonds, the Electronic Municipal Market Access (EMMA) platform provides fair pricing information. Corporate bonds require your own price comparison to verify the spread is reasonable. Treasury bonds, while not offered through government channels on the secondary market, are available through brokerage firms.

Building Resilience Through Bond Laddering

Some investors manage interest rate risk by distributing bond purchases across different maturity dates—a technique called bond laddering. This approach provides flexibility to respond to changing market conditions.

Here’s a practical example: With $15,000 to invest, rather than purchasing one $15,000 bond maturing in ten years, you could buy three $5,000 bonds maturing at one, two, and three-year intervals. Each year as a bond matures, you reinvest the proceeds into a new bond with your longest chosen maturity (three years in this example). This generates an annual reinvestment opportunity.

Bond laddering offers meaningful advantages. If interest rates rise, new investments capture better yields. If rates decline, your ladder includes locked-in maturities at previous higher rates. Additionally, staggered coupon payments improve cash flow consistency.

Challenges With Individual Bond Purchases

Direct individual bond investing presents real obstacles. The sheer complexity of comparing bonds, understanding nuanced differences, and accessing primary markets limits practical accessibility for most investors. Secondary market pricing opacity creates difficulty in determining true costs and identifying hidden markups.

For investors seeking less complexity without professional advisory services, two alternative pathways exist: bond mutual funds and bond ETFs. These vehicles offer fixed-income exposure with reduced operational burdens.

Bond Mutual Funds: Simplified Fixed-Income Exposure

Bond mutual funds provide many individual bond benefits with reduced complexity and risk. The mutual fund structure pools investor capital to purchase diversified bond portfolios. Key advantages include professional management and built-in diversification.

As investment professionals note, “Bond mutual funds benefit from having professional fixed-income experts managing the pool. Rather than holding ten individual bonds, you gain exposure to hundreds of bonds where individual positions have minimal impact on total results.”

Major Benefits of Bond Mutual Funds:

• Trading Flexibility: You purchase and sell mutual fund shares like stocks (though orders execute once daily after market close)
• Automatic Reinvestment: Funds streamline dividend reinvestment, allowing earnings to compound within your investment
• Consistent Income Streams: Beyond reinvestment, most bond funds offer monthly distributions for investors prioritizing current income
• Tax Advantages: Municipal bond funds potentially provide tax-free income at federal, state, and local levels, depending on your tax circumstances

Bond mutual funds charge annual management fees expressed as expense ratios. A 1% expense ratio on a $1,000 investment costs $10 annually. Most funds establish minimum initial investments, which vary between regular brokerage accounts and retirement accounts like IRAs.

Bond Exchange-Traded Funds: Flexibility and Lower Costs

Bond ETFs represent another pathway for how to buy bonds efficiently. Like mutual funds, ETFs hold diversified bond baskets following specific strategies. They can be actively or passively managed, but typically feature lower costs than mutual fund equivalents.

Cost advantages matter significantly. “ETF investors benefit from minimal expense structures, keeping more of investment returns rather than paying management fees. For newer investors or those with limited capital, ETF entry costs amount only to the fund’s net asset value rather than substantial minimum investments required by many mutual funds.”

ETFs provide superior liquidity compared to mutual funds. ETF shares trade continuously during market hours like stocks, not once daily. Bond ETFs also provide regular income distributions like their mutual fund counterparts.

When deciding between mutual funds and ETFs for fixed-income exposure, consider your investment timeline and trading frequency. Long-term holders may prefer mutual funds’ lower trading-related charges, while active investors often favor ETFs’ absence of redemption penalties.

Putting Your Bond Strategy Together

Whether purchasing individual bonds, selecting bond mutual funds, or choosing bond ETFs, fixed-income investments deliver portfolio diversification and reliable income. Regardless of your chosen path for how to buy bonds, conduct thorough research: examine issuer quality, analyze credit ratings, and consult with financial professionals when helpful.

The most important step is starting. Even modest fixed-income allocations meaningfully improve portfolio resilience during market turbulence while establishing a foundation for income-focused investing strategies.