How the broker is compensated for selling bonds

The way brokers pay for selling bonds depends on their ability to act in the transaction. Most bond transactions are initiated by brokerage firms, which can act as principals to sell bonds from their own inventory, or act as agents to buy and sell bonds on behalf of clients in the open market. The company receives different compensation in each case.

Sell ​​bonds as a principal

Many broker-dealers keep stocks of bonds they buy through public offerings or on the open market. Because broker-dealers own the bonds, they can increase the price when they are sold, which means that bond buyers pay a higher price than the company buys the bonds. Markups are a legal way for broker-dealers to profit. Clients do not know the original transaction of the broker-dealer, so they cannot know how big the markup they paid, or even whether they paid any markup. In many cases, customers buy bonds from broker-dealers, thinking that there are no other costs other than a small transaction fee.

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The customer’s problem is that they don’t know how much compensation the broker-dealer received from the transaction because the company is not obliged to disclose this information. To the customer, it may appear that no commission is charged because the transaction is recorded at a markup. The price increase of one company and another company may be very different, and each broker has the full right to decide how much to increase or decrease the bond price in any transaction. However, if a customer purchases a newly issued bond, everyone pays the same price for it, because the broker-dealer’s mark-up is included in the face value price of the bond and there is no separate transaction cost.

Agent sales of bonds

When a client wants to purchase bonds that are not owned by the broker’s dealer, the purchase must be made on the open market. In this case, the company acts as an agent for the customer to purchase bonds and collects a commission for this. The commission ranges from 1% to 5% of the bond market price. The commission earned by the broker-dealer must be disclosed to the client after the transaction is confirmed.

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Buying and comparing bond transaction costs

Investors do have options when buying bonds that can be purchased from many different sources. Larger brokerage firms or securities companies usually have the largest bond issuance inventory, but since transaction costs do not need to be disclosed, it is difficult to compare transaction costs. You can compare your bond purchase price with the actual price paid by the company on InvestingBonds.com, which reports all information related to bond transactions on a daily basis.

You can buy bonds on the open market through any securities company, including discount brokers (such as Charles Schwab) and online brokers (such as E*Trade). Depending on the particular bond issuance, many discount and online brokers may charge a fixed fee for the transaction. Because they are agents of the transaction, they must disclose all fees or commissions before the transaction.

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There are always transaction costs when investing in bonds. Before you invest in bonds, please do your homework and ask your broker questions to determine whether the fees he charges you are reasonable and fair.

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