Pick an on-line broker who trades bonds
Saturday, June 23, 2001
ROB CARRICK

If I were choosing an on-line broker for myself right now, I'd look for one thing above all.

Don't be surprised when I say that it's on-line bond trading.

Reasonably priced stock-trading commissions are important, as are clean, quick trade executions, a slick Web site and toys for researching stocks and funds. In the end, though, what really matters is having the means to build a proper portfolio.

Without bonds, you don't have a proper portfolio. Some small investors may have thought otherwise, but the stock market's volatility over the past year has shown the benefits of diversifying into bonds, as well as cash.

Question: How do you buy bonds when you invest through an on-line broker?

Many people go with bond mutual funds, while some others choose guaranteed investment certificates. Both are less cost-effective than actual bonds.

Problem is, buying bonds through an on-line or discount broker is a hassle because it generally has to be done on the phone. Just imagine scrawling notes while an agent at your brokerage reads off the details of a dozen or so different federal, provincial and corporate bonds that might meet your requirements.

On-line bond trading simplifies the process, making it much easier to buy bonds themselves instead of more costly substitutes. All you do is pick a bond from the on-line inventory and specify how much you want to buy or sell.

Unfortunately, only three brokers in Canada offer on-line bond trading right now and one of them, EBond, http://www.e-bond.ca , is a bonds-only dealer. (EBond is looking at adding stock trading).

The other two firms with on-line bond trading are BMO InvestorLine, http://www.bmoinvestorline.com , which introduced the service almost a year ago, and TD Waterhouse, http://www.tdwaterhouse.ca , which has been at it for all of a few weeks.

Each of the three firms has done good work. The bond-trading screens on their Web sites are elementary to use, even if you're an on-line investing rookie.

If you're a newcomer to bonds, you'll want to poke around the sites a bit to familiarize yourself with the necessary bond jargon. Each of the three Web sites offers help for newcomers, typically a glossary and/or a list of answers to frequently asked questions.

The first question I'd ask would be: How much does it cost to buy bonds?

Unlike when you trade stocks, there is no commission tacked on to your transaction cost when you buy or sell a bond. Instead, brokers make their money in the spread between the price at which they buy and sell bonds.

You can see this clearly on the TD Waterhouse and EBond sites. For each bond they offer, both brokers list a price at which they'll sell it (also called the ask price), and a price they'll pay to buy it (the bid price).

Investors rightly care more about the yield, or return, offered by a bond than the price. Suffice it to say that as you pay more for a bond, the yield on your bond declines.

When on-line bond trading becomes a little more widespread, I'll do a comparison to see which brokers offer the best prices.

For now, you can do some rudimentary comparison shopping by checking the bond-price ticker on EBond's Web site against what Waterhouse or InvestorLine offer.

It's worth noting here that when you buy a bond from a full-service broker, you're generally given a price and yield only. You have no idea how much the bond price has been marked up.

If you want to add bonds to your portfolio, you'll have to buy a minimum of $5,000 in face value. Your actual cost could be higher or lower than $5,000, depending on the market price of the bond.

Want a simple entry into the bond market? If you're investing for your registered retirement savings plan, try strip bonds.

Strips are federal, provincial and corporate bonds that don't pay interest twice a year like most bonds. Instead, you buy a strip at a discounted price and then redeem it for its face value. The difference between what you paid and what you get is computed into a yield that you'll see at the time of purchase.

The beauty of strips is that the yields are better than GICs, and there's a near infinite range of terms available.

"People love strips," says EBond president Lorne Erenberg. "They're the easiest, cleanest [bond] you can buy in terms of understanding their mechanics."

One proviso: Strips aren't great for non-registered accounts because they are subject to tax each year, even though they don't pay annual interest.

If you want to be an effective do-it-yourself investor, you need strips or other types of bonds.

That's why I'd only choose an on-line broker offering on-line bond trading.