Bond trading

DEFINITION of Bond trading

Bond trading is the way of making a profit from fluctuations in the value of corporate or government bonds. Many view it as an essential part of a diversified trading portfolio, alongside stocks and cash.

WHAT IT IS IN ESSENCE

A bond is a financial asset that works by allowing individuals to loan cash to institutions such as governments or companies. The institution will pay a defined interest rate on the investment for the duration of the bond. And then,  give the original sum back at the end of the loan’s term.

The bond is a fixed income investment in which an investor loans money to an entity, typically corporate or governmental. Those entities borrow the funds for a defined period of time at a variable or fixed interest rate.

Owners of bonds are debtholders, or creditors, of the issuer. Bond’s end return is fixed, that’s why the market conditions surrounding its sale can cause fluctuations in its price to buy.

High interest rates, for instance, tend to make bonds less attractive to investors by providing other resources of achieving high returns with low risk. For this reason, interest rates and bond prices tend to have an inverse relationship.

HOW TO USE

An understanding of the bond market and bond trading is essential to properly invest. How bonds are traded in the market are confusing to most people. But they are very important to the economy and the prevailing level of interest rates.

Traders can use financial derivatives to speculate on a bond’s market price not just buy bonds. Spread betting is a popular form of bond trading for people that only wish to trade the volatility in a bond’s price, without purchasing the underlying asset: but it also comes with significant risks and losses can exceed deposits.

Trading bonds happen thousands of times a day. And it is an important part of global economic markets.

The bond market is far bigger than the stock market and central banks conduct monetary policy in the bond markets. When buyers and sellers are trading their bonds, they dictate the yields of the various types of bonds they are trading. This, in turn, sets the price of credit in the economy.