For risk-averse investors, municipal bonds are a great investment.Municipal bonds are debt obligations of state or local governments.You are loaning money to the government in exchange for interest paid to you over the life of the bond.When the bond matures, the full amount you invested is returned to you.Most muni's are purchased through brokers.
Step 1: You can open an online account.
Direct online trading is the easiest way to buy bonds.You create an online account with a broker-dealer, and you are in control of which bonds to buy.You can use online brokers.Fidelity, E-Trade, and Scottrade are some of the well-known companies.You can compare online accounts.A broker may add to the price of a bond with mark-up fees.If you pay $1,000 for a bond, you'll pay an additional $40 for it.
Step 2: A full-service broker is a good choice.
Hire a broker-dealer if you want someone to buy muni's for you.You pay a broker-dealer a fee to buy munis.A commission is what the fee is.You need to give the broker explicit permission to buy the bonds on your behalf.If you want help with an investment strategy, consider a full-service broker.Tax advice and retirement planning are provided by full-service brokers.You pay more for these services.A broker can be found online.Ask if they are registered with the government.It is important to check the broker's background with the government.The Financial Industry Regulatory Authority is located in the U.S.
Step 3: Work with an investment adviser.
A broker-dealer is similar to a registered investment adviser.They don't need your explicit permission to buy muni's for you.They can make investment decisions based on the strategy you've agreed upon.You can find an RIA on the internet or in your phone book.Before hiring an RIA, you should research them.If they have had problems with regulators or clients, you should check out their Form ADV.You can get this form from your state's securities regulator or online at the Investment Adviser Public Disclosure website.
Step 4: Buying bonds directly is a good idea.
It is possible to buy muni's without using a broker-dealer.Ask your local government if it has an early-purchase period for individual investors.Buying bonds in the primary market is a way to do this.You may need to have an account with one of the banks.People with a high net worth are usually the ones buying in the primary market.
Step 5: Understand the type of bond being offered.
State and city governments issue municipal bonds.There are two types of bonds.General obligation bonds are bonds that governments issue to cover expenses.They are supported by the government.Specific infrastructure projects, such as building a new toll highway, are funded by revenue bonds.They are supported by the income created by those projects, which makes them less safe than general obligation bonds.
Step 6: You can read the official statement.
An official statement similar to a prospectus is published when bonds are issued.The statement should be read by you.Information about the financial condition of the issuing government or agency will be contained in it.There are also event notices in the newspaper.They change the information in the statement.You will be told if there have been any delinquent payments.Your broker should be able to provide this information.You can get it from the EMMA website.
Step 7: The government has a rating.
The government might not be able to pay back the bonds if you buy muni's.Credit-rating agencies rate the creditworthiness of bonds.You can find ratings from Moody's Investors Service and Standard & Poor.The highest rating a credit agency can give is either Aaa orAAA.The default level for Moody's is C.
Step 8: Expect more risk for a better reward.
A bond will pay higher interest if the rating is lower.You can potentially make a lot more money if you buy bonds rated Ca or lower, but that comes with a greater risk that you won't get paid at all.If you are concerned about risk, you should invest in bonds with a rating of at least B.
Step 9: You can hold bonds in two different ways.
You can invest in bond funds or buy individual bonds.A mutual fund can invest in many different municipal bonds at the same time, and you can own a share of that collection of bonds by buying shares of the fund.The fund's managers will decide which bonds to invest in.The municipal bond exchange-traded fund can be used to own muni's.Bond mutual funds can hold a wide variety of bonds.It is possible to sell shares in an exchange traded fund much faster than it is in a mutual fund.Diversity is the greatest benefit of municipal bond mutual funds.Any specific default won't hurt you much because they own hundreds of different bonds.Fund shares can be bought using an online account or by contacting a registered investment adviser.
Step 10: The tax consequences can be considered.
You can affect your tax rate by owning bonds.Before investing, you should consider tax consequences.Contact a tax professional if you have a question.The interest you earn on a municipal bond is not subject to federal taxes in the U.S.Some muni's are taxed.The bonds are taxed at the federal level.If you buy muni's from your state or local government, you can avoid state and local taxes.Some governments do not offer this tax break.If you are subject to the Alternative Minimum Tax, a muni may be taxed.
Step 11: A buying strategy can be developed.
You should know how long you want to keep the bonds.Most people who buy muni's hold on to them until they mature.They may continue to buy more bonds after maturity.You can own bonds with different maturities.A "bond ladder" provides a steady income stream using bonds that mature and pay on successive dates.You can use the income to invest in more bonds if you prefer.
Step 12: You can place an order with your broker.
Tell your broker-dealer which bonds you want to buy and the number of them.They will help you through the process.
Step 13: You can order it online.
You can buy bonds with your online account.The number of bonds you want to buy should be listed.You will buy shares of the fund rather than specific bonds if you are buying into a bond mutual fund.