- 1). Open an account with Scottrade and fund with at least $10,000 for the purchase of individual bonds. It is important to remember that Scottrade will act either as a dealer or broker, for which they take a fee for matching buyer and seller. Scottrade sells corporate bonds, municipal bonds, bank certificates of deposit and treasury securities on-line. The account is not considered open until approval is granted from Scottrade and the funds have cleared the bank account.
- 2). Know the credit you are buying--and the credit risks you are undertaking. Scottrade has over 400 offices and each office has representatives that can aid you in your bond search. The universe of bonds is very large and no one can be an expert in all the different forms that fixed income bonds are structured in. Study credit ratings and use the outside resources available on the web and offered by Scottrade as primary reference sources.
- 3). Invest after considering the following minimum concerns every investor faces: what length of time or maturity should I purchase? What minimum credit rating should I accept? Investment grade rating is a minimum of BAA-1 by the three major rating services (Fitch, Moody's Investment Service, Standard and Poor). Ratings do change over time depending on market conditions. Consider the call feature, the liquidity of the bond, the inflation risk that will impact the bond value, and the taxable or tax-exempt feature of the bond.
- 4). Diversify your bond portfolio immediately by buying a bond fund managed by an investment company. These funds may be a mutual fund, an open-ended bond fund trading on a major exchange, a unit investment trust, or a closed-end fund. This helps you avoid investing the full $10,000 in just a few bond issues and increases the liquidity of the portfolio. It is recommended that bonds be purchased this way until a minimum $100,000 of bonds can be purchased.
- 5). Use the bonds purchased in your Scottrade account as collateral for your margin account. Government bonds are eligible for 90 percent maintenance; municipal bonds and corporate bonds eligible for 70 percent maintenance. This is considerably better than the 50 percent maintenance of stock, and bonds and are not as volatile. Scottrade does need additional forms for margin accounts as required by regulatory authorities.
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