How to make money on stocks and bonds?

2.10.2022
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как зарабатывают на облигациях

This year, many states will begin to recover their economies from the effects of the coronavirus. Most experts believe that this year will be favorable for the development of low-cost markets. The same thing will happen with the currencies that suffered that year. When interest rates are low in the economy, investors start to “take a closer look” at undervalued securities.

Debt markets are characterized by limited growth potential, which means that investors can only expect a small profit. However, if you diversify your investments wisely and choose Eurobonds correctly, the result will be completely different.

The year 2020 has affected people’s habits. The epidemic of a new “contagion” and regular lockdowns have caused many countries to switch to the digital economy. In this regard, the securities of technology companies showed an increase in quotations during a downturn in economic development. In 2021, this trend is likely to weaken, and traditional sectors will have an opportunity to recover. However, the habits of people that were formed in 2020 have influenced the development of e-commerce. Yes, and remote work will remain in our lives now forever. All this suggests that the investment landscape will continue to change. In simpler words, investors will prefer technology stocks over traditional ones in the long run. Therefore, be careful when investing in securities.

The securities market is affected by the pace of the global economy’s return to its previous positions and additional government support measures. Due to the fact that the budget deficit has increased, as well as the need for borrowing with high debt, many countries will try to contain the decline in the level of domestic debt yields

All these prerequisites will certainly affect the ruble bond market. The Cabinet of Ministers will not stop issuing OFZs, as this is the only way to get the necessary funds for the budget. Of course, the amount of borrowing this year will be less than in 2020. Thus, the Ministry of Finance will restrain the yield of debt obligations. How to make money on bonds?

bond trading strategies

Many investors perceive bonds as an alternative to bank deposits. To some extent, this statement is true, but the bond market provides investors with more opportunities than bank deposits. We discussed this in detail earlier in this article.

Earning money on bonds is divided into 2 strategies:

  • active one;
  • passive.

An investor who has chosen the passive option pays attention to the credit quality of the security, and then chooses the average circulation period of the bond that he is going to buy. Thus, it creates a target duration. After that, it may not rotate in the portfolio for a long time. How to understand? For example, if the key rate has started to decline, then you need to focus on the longest-maturing bonds, and not look into the portfolio for several years. Coupons on them will be credited to the brokerage account, and the main income will be generated due to the growth of the security body against the background of a decrease in interest.

The active option involves looking for undervalued debt obligations that have a wider spread relative to OFZs. When an investor buys such bonds, they expect that they will return to the average spread in the near future. An active strategy includes:

  • participation in the initial public offering;
  • rate on improving the credit quality of the paper;
  • rate on the currency share of the portfolio.

In general, the statement that bonds are analogous to a bank deposit is too simplistic. If you manage debt securities correctly, a private investor will have huge opportunities to manage their own portfolio. Strategy bonds have only confirmed this statement over the past 2.5 years.

What are the earning strategies?

Bonds are perceived by people as something conservative and permanent, but no one sees them as a way to make good money. Many users think that only banks and states are engaged in this type of securities, since only they own untold wealth. In fact, everything looks different.

These days, bonds are not only a way to invest, but also a great tool for trading. How to trade bonds?

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how to trade bonds on the micex

How to trade bonds on the MICEX? The Russian debt securities market is not the most liquid, and investors do not take minor macroeconomic news seriously, because they do not allow scalping.

How do you earn money on bonds?

When buying any debt paper, you need to take into account the duration. Duration is the period during which an investor will be able to recover all their investments. In addition, it shows the sensitivity of the security to interest, as well as the overall risk. How to make money on bonds?

Currently, investors use the following ways to earn money: the junk bond strategy and the BLSH strategy. The advantage of the junk bond strategy is that it has a simple execution and is easily understood by investors. To use it, you need a credit rating of issuers and equity. The point of the strategy is to buy bonds owned by unreliable companies that offer a large coupon reward. How to trade bonds correctly?

When buying bonds, many investors expect that some issuers will still be able to pay out the announced coupon, which will eventually more than cover the value of the bonds of issuers who have defaulted. The strategy is similar in some ways to the lottery, where it is not known which side will be lucky. In fact, it is very easy to determine whether the issuer will be able to fulfill its debt obligations or not, all you need to do is study the news about the company and its financial statements.

When thinking about how to earn bonds, do not expect that the issuer will be able to repay debt securities with a yield of 150%. Be skeptical of issuers. If you really want to make money on bonds, you need an accurate calculation. The risk reward should be higher than the default probability of the company that issued the debt securities. This strategy is suitable for companies that are constantly in need of working capital – banks, MFIs, or startups that operate and generate profit.

To avoid mistakes in bond trading, analyze the companies that you have chosen to invest in using the following parameters::

  • degree of indebtedness;
  • liabilities and assets;
  • type of activity;
  • issuer’s history;
  • legal proceedings.

If the issuer meets your requirements, then you can take a risk and buy the bonds. However, in this situation, you will need to take into account the risks, because even bonds have them.

how to make money on bonds

The BLSH strategy has similar features to trading stocks or futures. How to make money on bonds? A bond, like any other security, can rise or fall in value. If you play this game, you can earn money.

The name of the strategy speaks for itself-buy cheaper, sell more expensive. This principle underlies all trading strategies, regardless of the type of security. The outcome of the strategy depends on the issuer’s news background and financial statements.

If you see that the issuer is experiencing financial difficulties, you can open a short position on their debt securities, but do not forget to take into account the services of a broker. This strategy is accompanied by a certain risk: if the company can quickly get out of a difficult situation, you will be left out of business, and you will also have to pay the broker a large commission. This result can be reached not only when selling securities. When buying bonds, you can get into the story that happened to Tatfondbank in 2017, when the company defaulted.

We have named only a part of the bond trading strategies, in fact, there are a lot of them, but the ones listed above are suitable for those who do not want to pore over a large amount of information and perform complex analytical actions. Trading on the stock market is always a risk that must be taken into account when making transactions, otherwise you may be left with a broken trough.

How to make money on OFZ bonds?

Experts recommend that novice investors choose several types of assets to invest in. They offer to invest part of the funds in OFZs. Of course, they will not give much income, but today they are the most reliable investments, because the debt on them will be paid by the state. In addition, by making investments in OFZs, you are entitled to a tax deduction.

Federal loan bonds are an option for long-term investments. If you need a financial airbag, then it is better to choose a deposit. Novice investors can start their business with debt securities that have a maturity of no more than 3 years. This way they will be able to gain their first experience of working with bonds, including understanding the mechanism of the debt market functioning. The advantages of OFZs are that the investor does not need to constantly pay attention to them and stay at the terminal.

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