Bond trading definition
Bond trading is one way of making 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.
A bond is a financial instrument 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.
How does bond trading work?
While a bond’s end return is fixed, the market conditions surrounding its sale can cause fluctuations in its price to buy. High interest rates, for example, tend to make bonds less attractive to investors by providing other means of attaining high returns with low risk. For this reason, interest rates and bond prices tend to have an inverse relationship.
As well as buying bonds during favourable periods, traders can use financial derivatives to speculate on a bond’s market price. 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.