Tap investing, also known as “Tap Issue,” is known by many names. It’s also sometimes referred to as a tap sale or a bond tap.
It is the act of selling bonds, issued at original value and sold at whatever the current market rate is. It’s a procedure that lets bond holders let go of bonds they’ve invested in.
What Is a Bond?
You need to understand bonds to understand tap investing. When a bond is issued, it’s a loan, usually to a company in need of money.
The person loaning that money is investing in the business the bond is being issued to. The person/business loaning the money makes money back in interest. The interest is set at a specific schedule and rate, set forth before the loan/bond is given.
There is always a specific date when the bond needs to be paid back by, which is the maturity date.
The bond’s interest rate is referred to as the coupon or sometimes the yield. In tap investing, the investor will also get the coupon with their investment.
The Details Involving Tap Investing
The person in need of the money is the bond issuer. The person loaning the money is the bond holder.
Issued bonds are available to the public market, which is where investors and lenders can purchase them.
There are times when a bond is held back, whether it’s the whole thing or just a portion, usually because the issuer doesn’t need the money immediately. This holding causes the bond to be issued at a later date to the public, and at this point, it has become a tap issue.
This is an investment you’ll be bidding on if you want to play this market. When the issuer makes the bond available, they begin to accept bids, but only through a specific time period. However, the issue goes for a fixed price sometimes, if not for a price created because of the demand for the issue.
Fixed price sales cause the issuer to pay a higher yield.
How to Make Money with Bonds and Tap Investing
Now that you have a little bit of an overview of how bonds work and how tap issue works, here is how this form of investing can help you make some money.
Just remember, each time you buy a bond you are lending money to a company or government that will be paying you back, with interest, within a set time. That interest is the main way you’re making money.
1. Making Money with Interest
Bonds usually have a fixed interest rate, and for the entire time you hold that bond you will be earning interest. There are, however, bonds with floating interest rates. This means that the rates will go up and down from time to time.
How often you receive those interest payments depends on the original agreement at the sale of the bond, or the agreed-upon plan between issuer and holder. Some may pay out quarterly, some yearly, or you may get the lump sum at maturity.
Make sure you know the stakes before investing, so you know when you can expect payouts.
2. Making Money by Selling
Interest isn’t the only way to make money when investing in bonds. You can also sell the bonds you invest in and make money that way.
If the bond you hold has a floating interest rate and interest rates are down, the price of the bond goes up. By selling when interest rates are down, you can make more money back than what you paid for the bond in the beginning.
You’ll no longer be earning interest on this bond though, since it’s no longer held by you. However, you will get the interest payments up until the time you sell it.
Beware of Bonds Losing Money
If you decide to let go of a bond before it matures you’re risking losing money, instead of making money.
Most people skilled in investing understand the risks of losing money before they get into the market. How you lose money is that you may get less than you paid for it or the issuer may default on their payments.
Knowing Bonds Is Half the battle
Understand that there is a difference in bonds and savings bonds. Tap investing requires investing in bonds that are issued by corporations or governments.
These are the bonds that will make money and that allow you to participate in tap investing. Just remember that you can lose money too.