Corporate and Municipal Bonds
Corporate and municipal bonds are substantially more expensive for retail investors to trade than similar-sized trades in common stocks. Trading costs including explicit commissions, mark-ups and mark-downs are significantly higher for retail-sized (small) bond trades than for institutional-sized (large) bond trades. Dr. Piwowar summarizes key findings in the academic finance literature on bond market trading costs, including research on the effects of adding price transparency to the bond markets, and explains how bond trading costs can be hidden in realistic examples using simple numerical examples.
Are Structured Products Suitable for Retail Investors?
Equity-linked notes - a type of structured product - are securities issued by brokerage firms and traded in the secondary markets like shares of common stock. These investments offer part of the upside from owning stocks but limit nominal losses if held until maturity. Once sold only to sophisticated investors, structured products are increasingly being sold to unsophisticated retail investors. Equity-linked notes are difficult to evaluate and monitor, have high hidden costs and are illiquid. They are therefore virtually never suitable for unsophisticated investors.