The pros and cons of debt trading that you should know

Posted by Deb | Guest Post | Sunday 20 May 2012 5:48 pm

The bonds that are issued by the US government, state government and the local corporations are known as the tradable debt securities. This form of trading is becoming increasingly common nowadays as a large number of people are changing the form of investment in order to make money. Debt security trading usually comes with huge amount of profit, if done in the proper way. You can earn a lot of amount from the changes in the interest rates and by taking a position in the distressed companies and in their distressed stocks. Debt trading proves to be a worthy alternative to commodity trading or stock market trading and if you’re not aware of the pros and cons, here are some of them.

Low margin requirements is an advantage of debt trading

Bills, notes and bonds, that are known as the treasury securities are traded in order to take advantage of the fluctuating interest rates. When the interest rates drop down, the Treasury prices rise and when the rates increase, the prices fall. Even with a low margin deposit, the traders can take a secured position in Treasury securities. The margin brokerage accounts need margin deposits of 5-10% and this will entirely depend on the maturity of the length of the bonds.

The active futures market is another advantage of debt security trading

The extremely active futures trading market will offer you trading in contracts of a wide range of debt securities. The contracts trade against the major Treasury securities, the interest rate indexes and the Federal funds rate. Futures trading will also allow the trader to take positions for moves that are in either direction of the prices of the debt securities and the associated interest rates. Futures trading of the debt securities will involve a larger amount of risk and all those traders that pick the wrong direction for their trades can lose a larger amount than what was actually invested.

You risk a large amount for a small gain and this is a disadvantage

Traders in the corporate debt securities trade high yield or junk bonds in order to make the higher interest rates on the bonds. The trader may also be able to achieve capital gains when the issuing corporation gets an upgrade in the credit rating. Another downside of the high yield bonds is a bankruptcy and the loss of the total invested principal. When the big companies like Lehman Brothers go bankrupt, their debt securities are worth pennies on the dollar.

Therefore, when you’re wondering about boosting your monthly income by investing in some asset, you should take into account the debt security trading so that you don’t have to worry about your soaring debt obligations.

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6 Comments »

  1. Comment by John — May 24, 2012 @ 10:34 pm

    Great to know all these stuff, thanks!

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  6. Comment by Nikenya — July 26, 2012 @ 10:42 am

    Nice information, sometimes is good to write some educative staffs like this so that people will be aware what is going on in the world. thanks again.

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