Bond brokers let you trade and invest in fixed income investments like corporate & government bonds. Compare bond trading platforms from brokers based in the UK so you can get the best online account for investing in bonds.
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What is a Bond Broker?
A bond broker is an investment platform or stock brokerage firm that offers access to bonds.
Bonds are fixed income investments that represent loans made by investors to borrowers. Typically, they pay a fixed rate of interest to investors for a certain period. At the end of the term, bonds are repaid in full. Bonds are issued by governments, states, companies, and other entities to raise money.
Bonds can play an important role in a diversified portfolio. One attractive feature of bonds is that they tend to offer higher interest rates than savings accounts. Another appealing feature is that they can be less volatile than stocks.
Investing in bonds as a retail investor can be challenging without a bond broker. Unlike stocks, bonds aren’t traded on a centralised exchange. Instead, they are traded over the counter (OTC). Most bond brokers offer access to a wide range of bonds and fixed income securities, including government bonds, corporate bonds, and high-yield bonds.
Where can you find the best bond brokers?
In the UK, many brokers offer bond trading platforms such as Hargreaves Lansdown, Interactive Investors and AJ Bell Youinvest. Through these brokers, you can buy bonds for your investment portfolio, often within a tax-efficient investment account such as a Stocks & Shares ISA or Self-Invested Personal Pension (SIPP).
When comparing bond brokers, there are several things to consider, including:
- The range of bonds on offer from each broker.
- The quality of each broker’s platform (ease of use, reliability, mobile app, etc.).
- The customer service and support offered by each broker.
- The research and investment tools provided by each broker.
- Brokers’ reputations (you can find reviews on Good Money Guide).
- Fees and charges.
- Whether the brokers are regulated by the UK Financial Conduct Authority (FCA) and whether you are protected by the Financial Services Compensation Scheme (FSCS).
Ultimately, the best bond broker for you will depend on what you’re looking for from them.
If you are looking to invest in bonds, you will need a broker that allows you to own the underlying bond securities or own ‘fractional’ bond securities. Some investment providers, such as IG Index, only allow you to trade bond price movements via Contracts for Difference (CFDs). With this type of financial instrument, you do not own the underlying bond securities.
Biggest bond brokers in the UK
In terms of the best UK bond brokers for retail investors, three brokers worth highlighting include:
Hargreaves Lansdown is the largest investment platform in the UK, with over 1.5 million customers. It won the 2021 Good Money Guide award for Best Full-Service Stock Broker. Through Hargreaves Lansdown, you can buy and sell UK Government bonds (Gilts), corporate bonds, and PIBS (Permanent Interest-Bearing Securities).
One advantage of investing in bonds through Hargreaves Lansdown is that bonds can be purchased within a range of accounts, including a Fund and Share Account, a Stocks & Shares ISA, and a SIPP.
Another advantage is that there are many bonds to choose from. Overall, there are hundreds of fixed-income securities on the platform.
On the downside, with Hargreaves Lansdown, most bonds, Gilts and PIBS can only be dealt with over the phone (some can be traded online). Phone dealing charges are 1% (£20 minimum, £50 maximum). Online bond trades are charged at normal share dealing rates (usually £11.95 per deal).
Saxo Markets is a financial technology company that has been operating in the UK since 2006. It is aimed at more experienced investors and traders. Through Saxo Markets, you can trade over 5,000 bonds online and more than 30,000 bonds offline.
One advantage of investing in bonds with Saxo Markets is that it offers a very diverse range of investments. Through its platform, you can access government and corporate bonds in Europe, the US, Asia, Africa, the Middle East, and Latin America digitally.
Another advantage is that the platform offers professional-grade investment and trading tools. For example, customers have access to high-level charts with 50+ technical indicators, integrated Trade Signals, and innovative risk-management tools.
One downside to Saxo Markets is that minimum investments are higher than on some other platforms. Bonds on Saxo Markets have different minimum trading sizes, which can be as high as 50k, 100k or 200k in the relevant currency. However, some bonds trade in lower sizes. There is a minimum limit of 10k in € or $ on all online bonds.
Saxo Markets offers three levels of pricing, depending on your account tier. Standard commission rates start at 0.20% and drop as low as 0.05% as you trade more.
WiseAlpha is an online investment platform that enables UK investors to invest in fractional corporate bonds. These are bonds that the company has purchased from issuers and split into smaller investments. Investors do not hold the underlying corporate bonds directly. WiseAlpha won the 2021 Good Money Guide award for Best Alternative Investment Account.
One advantage of investing in bonds through WiseAlpha is that minimum investment sizes are low. The minimum investment amount for each fractional bond is £100 or €100, depending on the currency of the bond. This is a small minimum investment compared to other investment providers. Hargreaves Lansdown, for example, has a minimum investment size of £1,000 for corporate bonds.
Another advantage is that investors can diversify their portfolios easily through WiseAlpha’s ‘Robowise’ feature. This is an automated investment service that enables you to automatically diversify your bond portfolio and rebalance it on an ongoing basis.
On the downside, the WiseAlpha platform is only available to investors that have significant financial experience. These include high-net-worth investors, self-certified sophisticated investors, advised investors, investment professionals, and institutional investors.
WiseAlpha offers a simple tiered approach to fees. Customers pay a service fee of:
- 1% per year on the first £20,000 of assets
- 0.75% per year on assets between £20,000 and £50,000
- 0.50% per year on assets between £50,000 and £100,000
- 0.25% per year on assets over £100,000
How to get a bond broker
If you wish to invest in bonds, you need to open an account with a bond broker. This is usually a straightforward process that can be done online.
To open an account with a bond broker, you will need to provide the broker with personal details such as your name, address, and National Insurance number. You will most likely have to provide identification such as a passport or driver’s licence, as well as proof of your address.
Once the account is set up, you will be able to fund your account. This can usually be done via card payment or bank transfer.
Once the account is funded, you will be able to start investing in bonds.
How to buy and invest in bonds
When investing in bonds, it’s important to consider your investment goals and risk tolerance. The best bonds for you will depend on several factors, including your income requirements, your investment horizon, and your ability to tolerate risk.
While the amount of interest paid on a bond is fixed, the yield (the interest payment relative to the current bond price) will fluctuate as the bond's price changes. A bond’s ‘yield to maturity' is the total return you will receive for holding the bond until it matures. Yield to maturity takes into account the redemption price and all the interest paid from the time of the purchase until maturity.
It’s important to understand that with bonds, risk and return are highly correlated. This means that the higher the yield on a bond, the higher the risk of default. One of the most common mistakes beginner investors make when choosing their first bonds is reaching for high yields. High-yield bonds can deliver high returns at times, however, these high returns come with a higher level of risk. For example, the issuing entity may declare bankruptcy and be unable to pay you back your initial investment.
When assessing bond risk, you can turn to credit rating agencies such as Standard and Poor's, Moody's, and Fitch for guidance. These agencies give bonds credit ratings, which indicate the probability of default. Typically, bond ratings are grouped into two main categories: investment grade (higher-rated bonds) and high yield (lower-rated bonds).
One of the easiest ways to manage risk when investing in bonds is to build a diversified portfolio of securities. A diversified portfolio might include several types of bonds, including government bonds and corporate bonds, as well as bonds with different maturities to reduce interest-rate risk.
Here is where you can find out how to invest in bonds. It’s important to understand the risks of investing in bonds before you invest.
How to make money from bonds
There are two main ways to make money from bonds.
Coupons (interest payments)
The first way to profit from bonds is to hold them until their maturity date and collect interest payments along the way. Interest is usually paid twice a year.
The second way to make money from bonds is to sell them at a higher price than you paid for them. For example, if you buy £10,000 worth of a bond and the market value of your bond investment increases to £11,000, you can sell for a £1,000 profit.
Bond prices can rise (or fall) for many reasons, including changes in interest rates, changes to a borrower's credit risk profile, and the time to maturity.
How is a bond valued?
Each bond has a ‘par value’, which is the amount of money that the bond issuer promises to repay investors at the bond’s maturity date. However, a bond can trade at its par value, a premium, or a discount. Bonds trade at a premium when the current price is higher than the par value. Discount bonds are the opposite, selling for lower than the par value.
A bond’s value can be influenced by several factors, including:
Interest rates are the biggest driver of bond prices and all bonds are affected by interest rate changes, regardless of the issuer or the credit rating. Bond prices are inversely proportional to interest rate movements. So, if interest rates rise, bond prices tend to fall. If interest rates fall, bond prices tend to rise.
Time to maturity.
Bonds are typically paid in full when they mature. Since a bondholder is closer to receiving the par value as the maturity date approaches, a bond's price tends to move toward par as it ages.
The entity’s credit rating.
If a borrower experiences a credit downgrade, its bonds are likely to fall in value. By contrast, if a borrower experiences a credit upgrade, its bonds may rise in value.
It’s worth noting that different brokers can offer different prices for the same bond. Because bonds are not traded in a centralised location like stocks are, brokers can set their prices.
In theory, the true value of a bond can be obtained by discounting the bond’s expected cash flows to their present value, using an appropriate discount rate.
When is the best time to buy bonds?
Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down, and when interest rates go down, bond prices go up.
The reason for this is quite simple. If interest rates are falling, older bonds that offer higher interest rates become more valuable, so their prices rise. Similarly, if interest rates are rising, older bonds that offer lower interest rates become less valuable, so their prices fall.
Given this relationship, the best time to buy bonds is when interest rates are falling. In a falling rate environment, bond prices tend to rise, generating extra gains for investors.
Can you lose money on bonds?
Yes, you can lose money on bonds. Although bonds are often seen as low-risk investments, it’s still possible to lose money on them.
One risk you face as a bond investor is that the issuer of the bond may not be able to repay some or all of its obligation. With government bonds, the risk of default is generally quite low; however, with corporate bonds, the risk is something to consider.
Another risk is that bond prices are constantly fluctuating and prices can move against you. If you need to sell a bond before its maturity and its price has fallen, you can lose money.
Finally, inflation is also worth considering. If you’re earning 2% from a bond and inflation is running at 2.5%, you’re losing money in real terms.
The easiest way to manage risk when investing in bonds is to own a diversified portfolio of securities.
What are the pros and cons of bond investing?
Benefits of bond investing include:
- Bonds are generally lower-risk investments. This means that they can add stability to your investment portfolio.
- Adding bonds to a portfolio of stocks can help lower overall portfolio risk because bonds behave differently to stocks.
- Bonds offer a predictable income stream, paying you a fixed amount of interest several times per year.
- Higher returns than cash savings. Yields on bonds tend to be higher than the interest rates on cash savings accounts.
Drawbacks of investing in bonds include:
- Lower returns than shares. Over the long run, bonds have generated lower returns than shares for investors.
- Less transparency. There's less transparency in the bond market than in the stock market, so brokers can sometimes get away with charging higher prices for individual securities.
- Interest rate risk. Bond prices are inversely related to interest rate movements. So, if interest rates rise, your bonds may fall in value.
- Credit risk. When you invest in a bond, you face the risk that the issuer may default on its obligations. You risk losing out on interest payments, getting your principal back, or both.
Why do people invest in bonds?
People invest in bonds for several reasons, including:
- Investing in bonds can be a good way to generate passive income. The yields on bonds are generally higher than the interest rates on cash savings accounts.
- Bonds are generally seen as lower-risk investments. This is particularly true when it comes to government bonds, as governments such as the US and the UK are unlikely to be unable to repay their debts. This means that you can be relatively confident that you’re going to see a positive return on your money if you hold the bond until maturity.
- Investing in bonds can be a good way to diversify your investment portfolio. If you own a portfolio of stocks and bonds, the bonds may provide protection when share prices are falling.
How to sell or cash in bonds
Bonds can usually be sold quite easily through bond brokers, although some bonds are less liquid than others.
It’s important to be aware that if you sell a bond before its maturity date, you may get back less than you paid for it. That’s because bond prices can fall at times. A bond’s price can fall if interest rates rise or the issuer's credit rating is downgraded.
Bond Broker & Bond Investing FAQs
How do bond brokers make money?
Bond brokers make money in several ways, including:
- Trading fees. Most brokers charge commissions to buy bonds.
- Price mark-ups. Many brokers keep inventories of bonds they have previously purchased through public offerings or on the open market. Because they own the bonds, they can mark up the prices when they are sold to investors.
- Trading spreads. Spreads are the difference between the price to buy the bond and the price to sell the bond.
- Annual account fees.
Can you buy bonds without a broker?
It’s sometimes possible to buy bonds without a broker. For example, in the UK, you can buy UK Gilts from the UK Debt Management Office.
There are several advantages of using a bond broker, however. The main advantage is that you will have more investment options.
Can you use a bond broker to buy any type of bond?
Through bond brokers, you can generally buy a wide range of bonds, including:
- Government bonds
- Corporate bonds
- High-yield bonds
However, the offering will depend on the individual broker.
Can you invest in bonds through an ISA?
Yes, you can invest in bonds through an ISA.
However, to comply with HMRC rules, bonds held within an ISA must be listed on a recognised publicly traded stock exchange, or the bonds must be issued by a company that is itself listed.
Are bonds high risk?
Bonds are generally seen as lower-risk investments. However, different types of bonds have different levels of risk.
For example, government bonds are considered to be lower risk than corporate bonds as the probability of a government defaulting on interest payments is much lower than the probability of a corporation defaulting on interest payments. High-yield bonds are generally considered to be higher-risk investments.
It’s important to understand that bond prices can rise and fall, and as an investor, you take on the risk that the value of your bonds could fall.
Can you buy bonds online?
Yes, you can. The easiest way to do this is to open an account with a bond broker, deposit funds into your account, and buy the bonds.
Is it possible to buy government bonds online?
It is possible to buy UK government bonds directly from the Bank of England without using the services of a bond broker.
However, the process is not that straightforward and you will need to register and be approved before you can do so.
Our expert guides on investing are designed to provide an overview and in-depth look at the various different ways to invest and who they are most appropriate for.