Everyone likes a bargain, and one way to save yourself money is to find ways to cut out middlemen. One way to do that when you're shopping is to buy directly from wholesale companies and other retail suppliers such as Costco (Nasdaq: COST ) , BJ's Wholesale Club (NYSE: BJ ) , and the Sam's Club division of Wal-Mart (NYSE: WMT ) .
Yet when it comes to financial services, cutting out the middleman can be more difficult. Although prices for most transactions have fallen sharply as a result of deregulation and increased competition from discount brokerage firms, you still need to use a broker to gain access to most stocks and bonds.
There are, however, a few ways to get direct access to investment securities. Some companies offer stock directly to investors through direct purchase plans. If, on the other hand, you're thinking about buying bonds, there's no better system than the website for the U.S. Treasury, known as Treasury Direct.
Financing the budget for the federal government requires the constant vigilance of the Treasury. Every week, previously issued Treasury securities mature, and the government must raise money to repay the principal due on those securities and to finance any additional expenditures. To provide the government with a constant flow of funds, the Treasury holds auctions of bills, notes, and bonds according to an established schedule, and different types of securities are offered at different intervals.
For instance, short-term Treasury bills with maturities of four weeks, 13 weeks, and 26 weeks are available at auction every week, while longer-term notes and bonds are auctioned monthly, quarterly, or twice a year. The amount of securities available in each auction depends on a number of factors, including how much money the Treasury needs to raise, the way in which the Treasury wants to allocate debt across various maturities, and the demand of bond-market investors.
The way each auction works is straightforward. Once the auction is announced, the Treasury accepts competitive bids from financial institutions and investors. Bidders must state the value of Treasuries they wish to purchase and the minimum interest rate they are willing to accept on the securities they buy. Once the bidding is closed, the Treasury puts the bids in order of interest rate, from lowest to highest. When enough bids have been accepted to cover the amount of securities the Treasury wishes to sell, then the final interest rate is calculated by looking at the highest rate at which a bid was accepted. All winning bidders receive this calculated final rate, even if some of the participants had submitted a lower bid.
In addition to competitive bids, the Treasury also accepts noncompetitive bids from small institutions and individual investors. Because noncompetitive bids are limited to $5 million, larger institutions tend to use competitive bids more often. By making a noncompetitive bid, the bidder agrees to accept whatever interest rate is determined at the auction.
Using Treasury Direct
Individual investors can participate in Treasury auctions by opening an account through the Treasury Direct website. You can open an account in minutes through the site's online application process. All you need to get started is to give the Treasury certain basic information, including your Social Security and driver's license numbers, e-mail address, and banking information. By giving the Treasury your bank routing and account numbers, you can link your bank account to Treasury Direct and allow transactions between the two accounts via electronic transfer.
Once you've established an account, buying Treasuries is easy. The "Buy Direct" menu asks you to pick what type of security you want and then directs you to provide more specific information, such as the exact term, how much you want to purchase, and which bank account you wish to use for funding. The system then notifies you of the next auction for that security. If the next auction is several weeks away and you don't want to wait, you can cancel the transaction at that point.
After the auction has been conducted, you can look up the winning interest rate and the final price of the securities you bought. There's typically a lag of two or three business days between when the auction is held and when your payment will come out of your bank account.
Getting money back
Depending on what type of security you buy, you may receive interest payments at regular intervals along with a final payment at maturity. You can specify whether you'd like these payments to be deposited directly into your bank account or reinvested in another Treasury security. The system also gives you several options for setting up recurring purchases or automatic reinvestment programs.
The primary drawback of Treasury Direct is that unlike a standard brokerage account, trying to sell Treasuries that you've purchased on Treasury Direct before their maturity involves a more complicated process. Treasury Direct allows only certain types of securities to be sold at all, and it charges a $45 fee for the service. Another drawback is that investors cannot use Treasury Direct for IRA accounts.
While it isn't the best vehicle for traders, Treasury Direct can work very well for investors who intend to hold their Treasuries until maturity. Except for the fee for sales, the Treasury offers all of these services at no charge. And for fixed-income investors looking for a way to cut out the middleman, Treasury Direct is indeed a bargain-shopping opportunity to investigate.
For more on everything you need to know about fixed-income securities, take a look at the Fool's Bond Center. Also consider the income opportunities available from stocks by trying out our Income Investor newsletter service, which is geared toward those who seek current income from their portfolio. Take a free 30-day trial run, and see for yourself.
Wal-Mart is an Inside Value recommendation, and Costco is a Stock Advisor pick.