Follow these points to help you approach the bond market in a safe and lucrative way.

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The emergence of a credible market for retail bonds makes this form of investing available to ordinary people like never before, but buyers should beware: this is for the sophisticated only. The following points should help you to approach the market called Orb, the Order Book for Retail Bonds in a safe and lucrative way.

Know your goals

Investing in retail bonds requires some knowledge of the time frame in which you will need your money. The bonds on Orb have a variety of maturity dates, and, although you can sell your holdings before your bond matures, you will incur charges and may get back less than you invested. If you know you will not need the money until the bond matures, this gives you more certainty.

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24 Jun 2013

Know the risks

Do your homework on the company concerned. Companies issuing bonds put out a prospectus, and many bonds are rated independently too. There is likely to be more analytical research put out on retail bonds in the coming weeks that should help you to decide. Be very aware of what you are being sold. Some suggest that companies are selling products that they could not sell to the big investors to less sophisticated retail investors. A recent planned Eddie Stobart bond issue did not go ahead because of a lack of demand, suggesting that in some cases the offers you are getting may not be competitive. Make sure that the reward you are getting is commensurate with the risk.

Consider your position

There are several big caveats when it comes to buying these bonds. The first is that you have little protection if a company goes bust, although you rank ahead of shareholders when it comes to getting any money back from a defunct company. As we all know after the credit crisis, even the most solid-seeming company can fail, so this needs to be taken into account very seriously.

Consider the charges

There are dealing charges to consider. It is not free to buy a retail bond, as it is to open a bank account you frequently pay more than 1pc of your investment to buy and sell, which eats into returns.

Look over the horizon

The price of bonds fluctuates according to demand. If interest rates rise, and the yield that you are getting on your bond begins to look less attractive by comparison with bank offerings, the price of the bonds will fall. Unless you buy an inflation-linked retail bond (which has a lower yield), you have no inflation protection.

Diversify

With retail bonds, as with everything, the trick is not to put all of your eggs in the one basket. Choose a diverse selection of strong companies, not just those paying the biggest yields, and keep a careful eye on your investment. Ensure that your entire portfolio contains a mix of shares, bonds, government gilts and other investments.