Debentures trading is one of the most lucrative forms of bond trading, with many debentures paying long-term dividends. This guide covers everything you need to know about trading debentures, from commissions and requirements to strategies and a tutorial on how to buy and sell debentures.
Use our list of the best debenture trading brokers and platforms to get started.
Debenture Trading Brokers
What Is Debentures Trading?
Debentures are a form of debt security issued by governments, banks and corporations to raise short-term funds. These bonds typically have long-term maturity dates of between five and ten years or can even be issued on a perpetual basis.
In exchange for trading these government and corporate bonds, investors receive regular interest payments and sometimes the choice to convert their debenture into a tradable share after the maturation period. Hence, these latter bonds are known as “convertible” debentures.
Investors can buy and sell debentures on platforms and apps via several leading brokers and trading programs. This makes multiple forms of debentures trading possible, including day trading, short-selling and long-term investing.
How Debentures Work
Several factors make up a debenture unit. Here’s what to look for when trading debentures:
The headline for many investors when choosing debentures for investment will be the coupon rate. This is the interest an investor receives for purchasing the bond, paid either as a lump sum on bond maturity or as regular payments.
Coupon rates can either be fixed or floating:
- Fixed interest rates will remain constant through all market conditions.
- Floating coupon rates will change based on inflation or other economic benchmarks, such as the yield of a central government bond.
The maturity date of a debenture allows investors to see how long the contract will run before the debt is repaid or the bond is converted into a share.
However, not all debentures have a maturity date. Bonds known as Perpetual debentures do not require the issuer to pay back their debts by a specific date. Perpetual debentures thus add uncertainty to trading bond debt, but this unknown can also present profit opportunities.
Convertible Or Non-Convertible
Convertible debentures give investors the right to convert their certificates into company shares after maturity. In addition, some debentures are partially convertible, allowing investors to swap their certificates for a combination of shares and cash.
Conversely, traders can only redeem non-convertible debentures for cash at the end of their maturity period.
Do your due diligence on the issuing firm for a debenture. With that said, the credit rating assigned to a debenture or the company behind it can be an efficient way to gain a quick understanding of the risk of an investment.
Debentures Vs Other Bonds
Debenture trading differs from other types of debt security in that no collateral secures the bond. Instead, investors must rely on the trustworthiness of the government or corporation issuing the debenture.
As a result of the lack of collateral, debentures often pay a higher interest rate to investors than comparable but collateral-secured bonds. The key to trading economics in debenture bonds is balancing the risk of default with sizable interest payments. More on trading tactics and strategies later.
Third-party firms often give these bonds a credit rating to help traders establish which debentures are riskier. Debentures range from highly-rated US Treasury T bonds to “C” and “D” rated debts, where experts believe that default on the bond is likely.
What Happens If A Debenture Defaults?
Should the firm issuing the debenture go into liquidation, debentures are paid back after secured debts but before common and preferred shares. This means that none, some or all of debentures debts may be paid, depending on the firm’s assets and secured debt amount of the firm.
As a result, when investing in riskier debentures with lower credit ratings, it is important to research additional data on the trading economics of a bond issuer.
While no fees are inherent in debentures certificates, the general trading commissions levied by an online broker apply to debentures. These are charged either in the form of a flat fee or a percentage commission per trade. Charges can be viewed in the trading platform or app before you place an order.
Note, many brokers offer lower commission rates to investors with higher trading volumes or account capital. Compare the fee structure of several brokers to find the best deal.
Pros Of Trading Debentures
- High Rewards – Compared to collateralized bonds and other forms of secured debt, trading in debentures can offer competitive interest payments.
- Versatile Assets – Some debentures can be traded between investors, allowing diverse strategies such as bond shorting and swing trading.
- Fixed Income – Debentures with fixed coupon rates can provide a stable passive income in volatile or bear markets.
- Equity Options – Convertible debentures can be swapped for shares at the end of their maturity period.
Cons Of Trading Debentures
- Limited Trading – Some bonds cannot be traded between investors, giving traders limited options for trading in debentures.
- High Risk – When trading debt securities, investors should know that debentures are one of the riskiest due to their non-collateralized nature.
- Low Liquidation Priority – In the event of the bankruptcy of the debenture issuing company, debenture holders are below collateralized debt holders in the pecking order to receive funds.
- Returns Can Be Left Behind – Fixed coupon rate debentures can lose out to both the wider market and inflation over extended periods.
Our experts have put together some trading tips for debentures. Read on for tactics for debentures that are tradable on the secondary market as well as trading strategies for debentures that cannot be re-traded.
Due to the risky nature of debentures, especially bonds with low credit ratings, one strategy investors can adopt is building a diversified portfolio. At the very least, a diversified portfolio consists of a collection of debentures, with low and high credit ratings.
Fixed Vs Floating Coupons
When choosing a debenture, one of the biggest decisions for investors is choosing between fixed and floating coupon payments. Fixed-interest payments can provide a reliable source of passive income.
Debentures with floating coupon rates adapt to market conditions such as inflation and interest rates by tracking external benchmarks.
Long Vs Short
While debenture markets that support this type of speculation are limited, there is profit to be made speculating on bonds using derivatives.
How To Trade Debentures
To help you choose a provider and start trading, use our guide for beginners:
Choose A Broker
When it comes to choosing a broker for trading debentures and bonds, there are several factors to consider:
- Security & Regulation – The top brokers have solid security measures such as two-factor authentication (2FA) and are licensed by reputable regulators, such as the UK FCA or the US SEC.
- Trading Platforms – A reliable trading platform is required for effective debentures trading. Many platforms integrate recent and related news and charts with bond trading data to help investors analyze a debenture. The top brokers also offer trading apps.
- Trading Fees – Brokerages can have different fee structures based on trading volumes and account capital requirements. Prioritize brokers with competitive charges for their capital level and regular volume.
- Payment Options – One of our tips, whether for debentures trading or otherwise, is to ensure a broker has a reliable, secure and fast payment option in your local currency, such as PayPal, Skrill or Neteller.
Set Up An Account
Once you have decided on a debenture broker, it is time to set up an account. Enter your personal details and verify your account, often by email.
Many debenture trading accounts have a minimum deposit requirement. To satisfy this, fund your account using a secure and fast deposit method such as a bank card, Skrill or Neteller.
Decide On A Debenture Trade
The next step in the process of online trading of shares and debentures is to find the bond that you wish to trade. This should be a straightforward process on debenture trading platforms, as most will have a search bar where investors can type in the name of an asset.
Once you have found the correct asset, ensure you are familiar with the certificate terms. Check the coupon rate, credit rating and maturity date of a debenture. Many traders will also be interested in whether a debenture is convertible and when coupon rate payments are made.
Place Your Trade
For most debenture trades, it is as simple as purchasing the amount of debt you wish and then reaping the benefits.
To do this, purchase your chosen certificates on the debenture trading platform and then receive interest until the contract expiry or the bond defaults.
However, some investors may wish to short-sell these debentures or speculate on them using a leveraged derivative such as CFDs. In such trades, our experts recommend that investors set stop loss and take profit levels. In any case, traders will need to monitor these trades to decide when to cash out their investments.
The process of trading debentures is similar when it comes to bonds trading hours. The trading day depends on the exchange the debt securities are traded on. For example, debentures traded on the NYSE are available from 8 am to 5 pm Eastern Time.
In addition, debenture traders can take advantage of the early and late market sessions for most exchanges. This means that debentures are subject to limited trading in periods before and after the main trading day.
If a bond defaults, investors may run into a suspension of trading in debentures, meaning that it cannot be bought or sold. After this, the market may be reopened, or a trader may have to wait and see the amount of compensation they receive from a company liquidation.
Final Word On Trading Debentures
Trading debt investments can be a good way to earn regular passive income, and debentures are one of the most lucrative forms of bonds. Due to their uncollateralized nature, debentures trade at a premium compared to other trading debt equities.
Ultimately, trading debentures is a balance of risk vs reward, where traders need to use trading data such as the credit score and a company’s financial health to weigh up whether a bond is likely to default. And importantly, there is no guarantee they will make you rich.
Head to our list of the best debenture brokers to start trading today.
What Are Debentures In The Stock Market?
Debentures are a form of mid to long-term debt issued by companies and governments to raise capital. Debentures are not secured by any collateral and are an alternative to issuing shares which can dilute a company’s equity.
Can Debentures Be Traded?
Debentures can be purchased on bond trading platforms or speculated on using derivatives such as CFDs. When it comes to how to sell debentures, only some bonds can be traded on. See our guide to trading debentures for more details.
Where Are Debentures Traded?
Debentures trading occurs throughout the world. Debentures are sold in the UK to Nepal and on the Indian NSE.
How Many Types Of Debentures Are Available For Trading?
There are several types of debentures available to traders, including convertible, fixed, floating and perpetual bonds.
Debentures Are Traded In Which Market?
Debentures are traded in the bonds market. They are available from several leading brokers, including Interactive Brokers.
Can You Trade Debentures On A Bond Trading App?
Debentures are a type of bond, which means that they can be traded on a bond trading platform or mobile app. We have reviewed the top debenture trading platforms and apps in 2023.