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Buying in bulk means purchasing large quantities of a single product at a lower cost than you’d usually pay for the item. For example, you might buy a six-pack of shampoo for less than the per-unit price you typically spend on a single bottle. Or you might save big by buying a 10-pound bag of grapes instead of the usual one- or two-pounder.

But, like many things in life, buying in bulk has its pros and cons. For instance, you probably have to shell out more upfront to purchase larger quantities, and you might have trouble storing the items or using them up before their expiration date.

But like many things in life, buying in bulk has its pros and cons. For instance, you probably have to shell out more up front to purchase larger quantities, and you might have trouble storing the items or using them up before their expiration date.

Below, we’ll explore the ins and outs of buying in bulk, including whether it can save you money and how to avoid some potential pitfalls of bulk buying.

How Much Is “Bulk”?

There is no specific quantity you need to purchase to have something qualify as “bulk buying.” Rather, the term means you are buying large quantities of a single item to reap a discount.

That might mean you are buying one jumbo box of cereal (the kind that could feed a cabin full of summer campers) or a 12-pack of regular-size boxes bundled together. Or you might be buying 36 eggs at a time vs. the usual dozen.

The point is, it’s a larger quantity than what you might find at your local supermarket and at a lower price per unit. This can be an effective way to save money on groceries.

The Pros of Buying in Bulk

Here’s a look at some of the main advantages of buying in bulk:

You Can Save Money

Who isn’t looking for ways to save money daily? When you buy an item in bulk, you typically save money on the per unit price of that product. It may be a small difference but if it’s an item you use regularly, those savings can add up. For example, if you save 20 cents per coffee pod by buying a large quantity and you drink coffee daily, that adds up to $73 in money saved per year.

It’s Environmentally Friendly

Bulk purchases usually have significantly less packaging per use than smaller purchases have. For example, using one giant tub of laundry detergent rather than going through three smaller containers leads to less plastic waste.

Ideally, buying in bulk also means you shop less, and that’s less time spent on the road and burning gas.

You May Avoid Impulse Buys

You might rack up additional savings just by being in the store less frequently and having fewer opportunities to pick up things that weren’t on your list. If you’re motivated to save money, avoiding those impulse purchases can be a big plus.

You May Plan and Budget Better

If you’re the organized type who is big on preparing meals in advance, buying in bulk can make that endeavor easier and cheaper. Access to larger sizes of ingredients, like marinara, ground beef, mozzarella, and pasta, can make it cost-effective to cook lots of food and freeze it. That, in turn, can help you take better control of your food budget.

For sure, it’s cost efficient to prepare your family’s favorite pasta dishes and soups and have enough for today and whenever you’re ready for round two or three.

Finding the Price Per Unit

If saving money is important to you, there’s a good chance you want to know exactly how much you are benefiting by buying in bulk. To figure out the real cost, you may need to do some math. The first step is to determine the cost per unit. Sometimes, this number will be listed on the price signage at the store; otherwise, you can use the calculator function on your mobile phone.

•   What is a unit? Depending on the product, a unit might be an ounce, gram, gallon, square foot, or a single item.

•   Figure out how many units you are buying. Take the total cost of your purchase and divide that by the number of units to get the price per unit.

•   Then compare the unit prices of a few packages of the same product to determine which is the better value.

Ideally, the cost per unit of a bulk buy should be at least 20% below what you would normally pay at the supermarket.

Although a supersized item usually has a lower cost per unit than its smaller brethren, crunch the numbers to see.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

How Much Can You Save By Buying in Bulk?

No doubt, it can be hard to save money today, and you may wonder whether buying in bulk is worth it. The answer is: It depends. While the amount shoppers save depends on the item, it’s not unusual to save anywhere from 20% to 50% by purchasing items at the wholesale clubs vs. supermarkets.

You can also up your savings from buying in bulk by using coupons for those items.

Remember, what’s important isn’t an item’s price but the price per unit.

3 Tips for Buying in Bulk

When you want to stop spending so much and begin buying in bulk, you need a game plan. Here are three strategies to keep in mind:

1. Stick With What You Know

This is not the time to experiment. If you’re loading your cart with goods, you don’t want to be guessing about whether you’ll love them or not. Go for the family’s beloved items.

Buying in bulk and getting a deal is worthless if nobody wants to eat or use what you buy. That’s money down the drain.

2. Search for Your Favorites on Sale

It’s generally not a good idea to buy what’s on sale solely because it’s on sale. When trying to cut your grocery bill, the goal is to get what you know and love on sale, not to be overly adventurous. The latter can leave you disappointed, with a few fewer dollars in your pocket to boot.

3. Keep Expiration Dates in Mind

Do check expiration dates when buying in bulk. Items can expire before you get to use them, which is akin to throwing away your hard-earned money. Everything from sunscreen to olive oil can deteriorate when left to sit for long periods because you bought a mega-pack, so shop carefully.

What to Buy in Bulk and What to Avoid

Some products are perfect for stockpiling. While your list will depend on your family, think of items like:

•   Paper towels

•   Toilet paper

•   Tissues

•   Detergent

•   Dishwashing liquid

•   Sponges

•   Aluminum foil and plastic wrap

•   Toothpaste

•   Canned beans and fish

•   Frozen foods

•   Rice

•   Sugar

•   Flour

On the flip side, generally, you don’t want to load up on:

•   Fresh produce

•   Eggs

•   Meat or fish (unless you plan to freeze it)

•   Milk

•   Coffee beans

•   Snack foods/desserts (this could inspire you to overindulge)

The Cons of Buying in Bulk

Buying in bulk can work to your advantage, but it’s not without caveats. Here are some potential disadvantages to keep in mind:

Larger Quantities Can Mean Spending More

Bulk buying means spending more up front, which could put a strain on your finances. While paying $40 for $80 worth of lotion may be a good deal, it could backfire if you put that purchase on a credit card and can’t pay off the balance in full. You’ll then get hit with high interest fees, which can more than erase your savings.

You’ll Need Storage Space

Keep in mind, too, that you need space to store all that stuff and a car to pile it in to take home. If either of these are issues, buying in bulk may not be ideal for you.

You May Get Bored With Bulk Products

Know thyself…and your family. Maybe you are the person who gets bored quickly, or your kids will beg for some variety after you’ve bought 24 boxes of the same cereal. When you’ve got mega amounts of the same product, be prepared for the “same old, same old” for a long stretch. That’s all the more reason to purchase only what you love, as you may be using it for months.

You May Have to Pay Membership Fees

If you’re going deep into bulk buying, you likely won’t settle only for what you can get in bulk at the grocery store but will want to shop at the warehouse stores like Costco and BJ’s. Consider the annual membership fees that are required.

Costco’s “Gold Star” membership is $65 per year, and the “Executive” level is $130. BJ’s tiers are $60 and $120. Sam’s Club advertises membership fees of $50 and $110.

Will you frequent the store enough to make the fee worthwhile?

Bulk Quantities Can Lead to Overuse

If you have something in abundance, it’s all too easy to be less conscious of how much you’re using. Knowing you have 12 rolls of paper towel stashed away could lead you to use it up more quickly because you know you have backup waiting.

Bigger Quantities Means Spending More Cash

There’s also the issue that if you’re earning a lower income and/or have considerable debt, you may not be able to come up with enough money to purchase bulk products versus their smaller and less expensive single-use versions. One big purchase could blow your weekly budget. If you spend a chunk of money to buy a mega-pack of toilet paper, can you then afford other necessities?

Products May Expire

Buying in bulk can be a fun way to save money, but don’t get so giddy grabbing great buys that you forget important things like expiration dates. Products like bleach and sunscreen may expire in 12 months or less. And certain food products can expire as well. Getting a gallon of milk for the same price as a half gallon doesn’t yield any savings if it sits in your fridge for so long that it goes bad.

Buying in Bulk at Local Grocery Stores vs Wholesale Retailers

You may wonder if you should buy in bulk at your local grocery store vs. at a wholesale retailer (meaning places like Costco or Sam’s Club). It’s true that you may find good deals at your local supermarket (such as buy two cans of tuna and get two for half-price), and coupons can boost your savings.

However, it’s likely that these deals will be occasional. At a wholesale retailer or warehouse club, the business model is to have bulk quantities always available at good prices. That’s the company’s mission and what gives them bargaining power. In other words, their reason for being is to help customers buy in bulk and save.

While you may find great deals at your neighborhood grocery store that encourage you to stock up, you are likely to find smart deals in every aisle of a bulk retailer.

The Takeaway

Buying in bulk has its advantages. Getting a good deal can help you spend less and save more, but you’ll need to be savvy. Buy only what you need and what you can comfortably store and use in a timely fashion.

As with your local supermarket, temptation often lurks at bulk retailers. It’s best to prepare and follow a shopping list and know how to compare cost per unit to assess whether buying in bulk is worth it.

Armed with the right strategies, you can save real money by buying in bulk. As a next step, you’ll want to find a good place to stash that extra cash. If you’re in the market for a new bank, see what SoFi has to offer.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How much do you save if you buy in bulk?

While individual savings will vary, you may be able to save anywhere from 25% to 50% by buying in bulk.

Why is it cheaper to buy in bulk?

Buying in bulk is often cheaper per unit because it allows manufacturers to spread fixed costs over a larger quantity of goods, leading to lower production and distribution costs. This enables them to offer discounts for larger orders.

What are two downsides of buying in bulk?

One major downside of buying in bulk is the high upfront cost. The higher initial price tag may be difficult for some consumers to afford, even if the long-term cost per unit is lower. Another potential downside is the risk of waste. If you buy perishable items in bulk, you run the risk of them spoiling or expiring before you can use them.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.

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A key part of wrangling your personal finances can be building personal wealth and preparing for the future. There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then consider this deep dive into saving vs. investing accounts.

What’s the Difference Between Saving and Investing?

Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.

When to Save

Think of savings as a nice safe place to park your cash and earn some interest.

You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).

When to Invest

With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.

For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.

Ways to Get Started Saving and Investing

So, what are some smart ways to start your savings and investment plan?

•   First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.

•   One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available. You can use an online emergency fund calculator to help you do the math.

•   When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.

•   Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

Do Investments Count as Savings?

While there are similarities between saving and investing, there are also very important distinctions.

•   When you save, you are putting your money in a secure place. A bank account that offers Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance is a great example of this. You will be insured for up to $250,000 per account holder, per account ownership category, per insured institution in the very rare instance of a bank failure. And in many cases, you will be earning some interest.

•   With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you might wind up withdrawing funds at a moment where the economy is in a downturn and you experience a loss.

Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.

What Are the Different Bank Accounts I Should Own?

While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.

There are two rules of thumb when it comes to savings and checking accounts.

•   On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords (and possibly fees).

•   On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.

You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.

Having Multiple Bank Accounts

It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.

There are many good reasons to open a checking account. It can be the hub for your personal finances. Money rushes in from your paycheck, and then it is sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.

Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low or no fees, too. You may find the right combination of these factors at online banks, which don’t have the overhead of brick-and-mortar branches and can pass the savings along to you.

Any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.

A savings account can be a secure, liquid spot to stash an emergency fund. You might look for a high-yield savings account to earn a higher rate of interest. These are typically found at online banks and may charge lower or no fees.

A money-market account could also be good for an emergency fund since it’s an interest-bearing account. Unlike savings accounts, however, money-market accounts often have minimum deposit requirements. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is that they also offer such features as a debit card and checks. And typically, money market accounts are insured by the FDIC for up to $250,000.

What Is an Investment Portfolio?

The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money out at a particular moment, which could be due to the funds thriving or falling, depending on your scenario. It’s riskier, but also has the potential for long-term gains.

An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix can be a good way to diversify investments and help mitigate some market risk.

When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.

What Is a Savings Portfolio?

A savings portfolio can mean a couple of different things:

•   A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.

•   There are also savings portfolios which are investment vehicles for saving for college.

How Should I Start a Savings and Investment Plan?

A good way to start your savings and investment strategy could be to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee, which may be discounted or waived in some situations.

In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is it better to have a savings account or invest?

Whether a savings or investing account is better depends on your specific needs and situation. You may want both. Investing can hold the promise of high returns, but it involves risk. A savings account can grow your money steadily and securely.

How much can investing $1,000 a month give me?

The amount you make from investing $1,000 a month will vary tremendously depending on your rate of return and fees involved. It’s wise to consider the risk involved in investing, historic returns, and how much of any growth will go to paying fees.

What is the 50/30/20 rule?

The 50/30/20 budget rule is a popular way of allocating your take-home pay. It says that 50% of your fund should go to necessities, 30% to discretionary (or “fun”) spending, and 20% to savings or additional debt payments.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Unlike stocks, which are ownership shares in a company, bonds are a type of debt security. Various entities, ranging from federal and local governments to private corporations, may issue bonds to raise capital for infrastructure projects or company expansion.

Investors effectively loan money to the bond issuer in exchange for steady interest payments and a guaranteed return of principal when the bond matures.

For this reason, bonds are often described as fixed-income securities. And while there are bonds with higher and lower levels of risk, bonds in general are considered conservative investments because they are typically less volatile than stocks.

There is no bond market. Rather, bonds are issued over-the-counter via the primary market; they can also be bought and sold on the secondary market through a brokerage.

The bond market is vast and complex, comprising many different types of bonds and bond instruments (such as bond mutual funds and exchange-traded funds, or ETFs). Bonds can be used to provide income, support diversification, to help manage investment taxes, and more.

What Are Bonds?

Just as individuals often need to take out loans in order to buy a home or a car, governments, cities, and companies also need to borrow money for operations or expansion. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time to the bondholder.

Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but investors are able to lend them a lesser amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can often get better interest rates with bonds.

How Do Bonds Work?

Bonds are issued for a specific amount (the face value), and a certain length of time, called the “term to maturity.” A fixed amount of interest is paid to the investor every six months or year (known as the coupon rate), and the principal investment gets paid back at the end of the loan period, on what is called the maturity date.

In some cases, the interest is paid in a lump sum on the maturity date along with the principal.

For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10-year period, and will pay back the $10,000 principal at the end of the 10 years.

Bonds are generally issued when a government or corporation needs money for a specific purpose, such as developing infrastructure, making capital improvements or acquiring another business.

Investors can buy bonds directly through a government site, or via a brokerage or an online investing platform.

Holding Bonds and Trading Bonds

Investors who purchase bonds have the option of holding the bond to maturity, and then collecting the interest and the principal when they redeem the bond. But it’s also possible to buy and sell bonds.

Trading bonds requires a deeper understanding of how bond values change, based on the time left to maturity and the interest or coupon rate. The face value or par value of a bond — its value when it was issued — doesn’t change, exactly, nor does the coupon rate.

Similar to investing in stocks, the price you pay for bonds on the secondary market fluctuates, depending on various factors — including its yield and maturity. A bond with a longer maturity might be less attractive than a bond with a shorter maturity, owing to the risk of interest rates changing, for example. This is why longer-term bonds typically offer higher yields.

Recommended: How to Buy Bonds: A Guide for Beginners

Primary vs Secondary Bond Markets

Bonds are sold in two different markets: the primary market and the secondary market. But bonds are not traded on exchanges; they’re sold over-the-counter.

Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market (brokerages). One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.

Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating (more on that below).

Differences in Bonds

Bond terms and features vary depending on the type and who issues them. The main types of bonds are:

U.S. Treasury Securities

These government-issued bonds are considered among the safer types of fixed-income investments: they are backed by the full faith and credit of the U.S. government, which has yet to default on its debts. There are three main types of Treasury securities.

•   Treasury Bills, or T-Bills. These short-term Treasuries have maturity terms of four, eight, 13, 26, and 52 weeks. T-bills don’t pay a coupon rate; rather, investors buy T-bills at a discount to their face value. On maturity, investors get the full face or par value. The difference between purchase and redemption acts as a modest interest payment.

The sale of T-bills funds most government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.

•   Treasury Notes, or T-Notes. T-notes are sold at longer maturities of two, three, five, seven, and 10-year terms. These longer maturities pay a higher rate.

•   Treasury Bonds, or T-Bonds. This 30-year government bond is typically known as the long bond, and is similar to the T-note, except with a much longer maturity.

Treasury notes and bonds are issued at $100 par value per bond, with bond interest rates depending on the current environment.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Treasury Inflation-Protected Securities (TIPS)

These government bonds specifically protect against inflation, because the principal or purchase amount adjusts according to changes in the Consumer Price Index — either higher or lower, on a semi-annual basis. The coupon rate remains fixed, however.

At maturity, investors can redeem the bond for the original principal amount or the adjusted principal, whichever is greater. The bond is inflation protected in that the bondholder cannot lose their original principal.

Municipal Bonds

Also known as muni bonds, these securities are issued by cities and towns to fund projects like hospitals, roads, schools, and public utilities. They are somewhat riskier than Treasury bills, but muni bonds are exempt from federal taxes, and often state taxes as well.

As a result, munis generally pay a slightly lower rate than, say, corporate bonds or other taxable fixed-income securities.

U.S. Agency Bonds

U.S. agency bonds are debt obligations sold by government-sponsored enterprises (GSEs). While these are not fully backed by the U.S. government like Treasuries, agency bonds are offered by large federal agencies such as Freddie Mac and Fannie Mae, the Tennessee Valley Authority, the Federal Farm Credit Bank, and so on.

These bonds can offer a higher yield than Treasuries, depending on the maturity, without incurring substantially more risk than Treasuries.

Corporate Bonds

Riskier bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, the way a government might, and companies generally have some risk of failure.

The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.

Junk Bonds

Corporate bonds with the highest risk, and generally higher potential return, are called junk bonds or high-yield bonds. All bonds get rated from a high of triple-A down to junk bonds — more on bond ratings below.

Junk bonds are so called because the bond issuer has a lower credit rating than another company, which means there is a risk the investor could lose their principal if the company defaults. Junk bonds pay higher coupon rates to appeal to investors, and help offset some of that risk.

Convertible Bonds

Convertible bonds are a type of hybrid security issued by a corporation, which can be converted into stock at certain times throughout the term of the bond.

Convertible bonds, which pay a fixed coupon rate, can offer downside protection during times of stock volatility. And when the stock market is on an upswing, investors have the option to convert their bonds into shares.

There is no obligation to convert a convertible bond, however, and investors can hold the bond to maturity, collecting regular interest payments, and receive their principal at maturity.

Mortgage-Backed Securities (MBS)

These securities are different from traditional bonds, where investors lend their money to the bond issuer, who repays it based on agreed-upon terms. Mortgage-backed securities give investors a claim on the cash flow and interest payments from mortgages that have been pooled together by public or private entities, and sold as securities.

Ginnie Mae (short for the Government National Mortgage Association) is the U.S. government agency that issues most mortgage-backed securities. In addition, Freddie Mac and Fannie Mae, both U.S. government-sponsored enterprises (GSEs), also issue MBSs.

MBSs can be risky when mortgage holders default on their loans, but these securities can offer a steady yield that’s relatively high compared with other bonds. The GSEs that offer mortgage-backed securities offer certain repayment guarantees that help manage risk.

Foreign Bonds

Similar to U.S. bonds, investors can also purchase bonds issued in other countries. Similar to domestic bonds, these are generally issued in the local currency by governments or corporations. Bear in mind that these bonds carry the additional risk of currency fluctuations.

While it’s possible to invest in foreign bonds via a self-directed brokerage account, it’s also possible to invest in mutual funds or ETFs that have a portfolio of foreign bonds.

Emerging Market Bonds

Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth, and often provide higher yields as a result, but can also be riskier than investing in developed market economies.

Zero-Coupon Bonds

Zero-coupon bonds don’t make regular interest payments, but are sold at a steep discount to their face value.

Investors earn a profit when the bond reaches maturity because they receive the full face value of the bond at the maturity date. For example, a zero-coupon bond with a face value of $10,000 and a five-year maturity might be sold at a discount for $8,000. When the bond matures after five years, the investor would get $10,000 — getting the equivalent of a 4% coupon rate.

Bond Funds

Investors can also buy into bond mutual funds or bond ETFs, which are portfolios of different types of bonds collected into a single fund — similar to the way equity funds are based on a portfolio of stocks. There are bond funds that hold a portfolio of corporate bonds, government bonds, or other types of bonds.

These funds are generally managed by a fund manager, but some bond funds are index funds in that they’re passively managed and track one of the many bond indices.

Bond funds can be safer than individual bonds, since they diversify money into many different bonds.

Recommended: How to Buy Bonds: A Guide for Beginners

What to Consider When Choosing Bonds

When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.

The main features to look at when selecting bonds are:

Coupon

This is the fixed interest rate paid to investors based on the face value, and it determines the annual or semi-annual coupon payment. For example, if an investor buys a $1,000 bond with a 3% coupon rate, the coupon payment is $30/year.

Face Value

Also referred to as “par,” this is the price of the bond when it’s issued. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”

Maturity

The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date.

Bond maturity dates fall into three categories:

•   Short-term: Bonds that mature within 1-3 years.

•   Medium-term: Bonds that mature around 10 years.

•   Long-term: These bonds could take up to 30 years to mature.

Yield

This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield can change since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:

•   Yield to Maturity (YTM): Yield to maturity refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.

•   Current Yield: This calculation can help bondholders compare the return they are getting on different bonds, as well as other securities. You can calculate current yield by dividing the bond’s coupon by its current price. A $1,000 bond that pays $50 has a current yield of 5%.

•   Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t always useful.

•   Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.

•   Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.

Price

This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for.

Bond prices change as interest rates change, along with other factors, so it’s important to understand bond valuation.

Rating

As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.

Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.

Bond Market Terminology

When buying bonds, there are a few terms which investors may not be familiar with. Some of the key terms to know include:

•   Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.

•   Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”

•   Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.

•   Secured vs. Unsecured

◦   Secured bonds are backed by collateral whereas unsecured bonds are not. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral. Secured bonds are slightly lower risk than unsecured bonds, which are not backed by tangible assets, and as such tend to pay a lower rate.

◦   Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. The other difference between secured and unsecured bonds is the lower credit rating and the higher rate unsecured bonds may offer to be more attractive to investors.

The Bond Market and Stocks

There is an inverse correlation between the bond market and the stock market, and the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.

When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.

How to Make Money on Bonds

While one way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.

As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.

There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.

Potential Advantages of Bonds

There are several reasons that bonds may be an attractive investment.

•   Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.

•   Security: Although bonds offer lower return rates than most stocks, they generally don’t have the volatility and risk.

•   Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.

•   Diversification: Bonds can provide diversification. Building a diversified portfolio can help manage portfolio risk.

•   Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.

•   Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and potentially make a profit.

Potential Disadvantages of Bonds

Bonds also come with potential risk factors to consider.

•   Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash may not be available for use for a long period of time.

•   Bond Issuer Default and Credit Risk: Most bonds are considered low risk, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.

•   Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see higher returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.

•   Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.

•   Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.

•   Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.

•   Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.

How to Buy Bonds

Bonds differ from stocks in that, for the most part, they aren’t traded publicly on an exchange. Investors can buy bonds directly from an issuing entity, such as a government or company. And they can also buy and sell bonds on the secondary market, through a brokerage.

When using a broker, it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data, and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.

As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.

The Takeaway

Many investors focus on the performance of the stock market owing to its volatility and its capacity to make headlines. But the global bond market is actually far larger — with a $140 trillion capitalization, versus $115 trillion for the global stock market, as of the end of 2023.

The bond market may be complex, but it can be rewarding. And bonds tend to have a lower risk profile compared with stocks. As such, bonds can play an important role in investors’ portfolios, owing to their potential to provide steady income as well as diversification.

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FAQ

Do all bonds pay interest?

No. Most bonds pay a coupon rate, a fixed interest payment every year or every six months. But zero-coupon bonds are sold at a discount to their face value, for example, and rather than pay interest these bonds can be redeemed at maturity for the full face value — effectively providing a fixed return.

Can you lose money with a bond?

Yes, bonds may be less risky than stocks, but you can still lose money with bonds. For example, a high-yield or junk bond may promise higher rates, but these bonds are at a higher risk of defaulting. It’s also possible to lose money on bonds when interest rates fluctuate, potentially reducing the value of the bonds you’d hoped to sell.

What is the coupon rate versus the coupon payment?

The coupon rate of a bond is the interest rate that’s set when the bond is issued. For example, you might buy a $1,000 bond with a 3% coupon rate. The annual coupon payment is the % rate x the face value (0.03 x $1,000) or $30 per year.

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