Buying bonds is tricky. With a stock, you can pull up a quote on your computer, and -- presto! -- you have a good idea of the going price.
Generally, you're going to get the same price for a share of Coca-Cola
Most bonds don't trade on a centralized exchange. And instead of charging a commission, most brokerages (discount and full-service) imbed a "markup" in the price of the bond. This makes it difficult -- if not impossible -- to know what fees you paid.
BusinessWeek highlighted the problem last year. The magazine test-drove the bond sites of five online brokerages -- Schwab
While these outfits call themselves "discount brokers," the "discount" applies only to stock transactions. Buying bonds, especially smaller amounts, can be expensive. BusinessWeek found, for example, that a single General Electric
Additionally, the markup on a bond may not be disclosed. Last time we checked, Schwab and TD Waterhouse charged a minimum markup of around $50 per purchase, and would reveal the actual markup to customers who ask. E*Trade and Fidelity wouldn't reveal their markups and charged transaction fees of $40 and $50, respectively, on smaller orders. Harrisdirect, on the other hand, told investors up front that it charged a flat $45 fee on purchases of 15 corporate bonds or less.
What's a fixed-income investor to do? Here are some ideas:
- Avoid buying bonds in small quantities.
- Bond mutual funds can be cost-effective, but they have their own problems. Look for short to intermediate maturity bond funds. The shorter the maturity, the less the value of the funds will react to the whims of interest rates.
- There is no need to buy Treasury securities from a broker or through a mutual fund. You can buy them from Uncle Sam, commission-free, at TreasuryDirect.
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