Introduction to Fixed Income Trading

There are various types of trading out there. These include stock trading, and forex trading, among others. But now, we’re here to introduce you to another type, which comes in the form of fixed income trading.

Despite the fixed income trading being more than twice the size of the equity market, it is considerably less popular in the media and the general investing public.

Fixed Income Trading is what you call the process of trading fixed income securities over-the-counter (OTC). This is described by buying and selling securities that have fixed maturity date, and pays interest annually.

The securities in this market are issued with the purpose of borrowing money for a fixed term. An example of this will be bonds.

A bond mostly operates the same way an IOU does. You lend your money to an issuer for a fixed period of time in exchange for interest payments over the term of your investment. You will then receive the full payment for your investment, or capital, at the end of the term, which is commonly known as ‘maturity’.

There are numerous types of bonds that you can choose from.

The main types are the government bonds (directly issued by a government; explicitly guaranteed), semi-government bonds (not directly issued by the government but has direct or implied guarantee), and the corporate bonds (issued by public companies for fund expansion and other major projects).

It’s important to note that the fixed income market has low transaction costs, a competitive structure, and diverse participants.

Also, unlike with forex trading, which can be traded as long as the transaction is within market hours, the money borrowed through fixed income trading must be paid in a fixed amount of money on a fixed schedule.

If you’re a retiree, it's advisable for you to consider investing in fixed income investments due to the reliable returns that it offers.

Equities VS Fixed Income Trading

As stated before, the fixed income market is almost double the size of the equity market, but there is much less knowledge on this type of trading.

There are two huge differences between the equity market and the fixed income market.

The first one is the total number of securities available in the fixed income market. If you’re interested in investing in the stock of one company, you only have to consider one security. But if you decide to invest in the bonds of that company, you will have numerous securities you can choose from.

This can make portfolio diversification that much easier for you while also lessening the risks.

The second major difference is found in the area of price transparency. Stock prices can be easily seen, changes are immediately announced to all market participants. You can then make sure that you were able to receive a fair market price at the time of your purchase.

In contrast to this, trading in the bond market is done dealer-to-dealer or dealer-to-investor. You won’t have a central record of all transactions that you can use as basis of the prices in the bond market.

Fixed income trading is something that can be and should be considered if you’re looking for a steady source of income. Learn more about trading and decide which will be the best one for you.

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