In the last investing blog post, I talked about inflation as another reason why you must invest. Now we will continue the discussion to talk about how to invest.
Except from The Graduate’s Guide to Money:
How To Invest
At the most basic level, you need an investment account. To get one, you can:
- Open a 401(k) or other retirement account through your employer’s retirement plan.
- Go online to one of the brokerage sites and open an account (Schwab, TD Ameritrade, Fidelity, e*Trade, etc.).
- Go to a mutual fund company (Vanguard, T. Rowe Price, Invesco, etc.) online and open an account with them.
- Go to www.computershare.com and open an account to buy corporate stocks starting with small dollars (some as low as $50 to get started). These are direct stock purchase plans (DSPPs) or dividend reinvestment plans (DRIPs).
Types of Accounts
- Individual: Opening an individual, non-qualified account means that you, and you alone, own the account (individual), and it has no special tax benefits (non-qualified).
- Qualified accounts are retirement accounts. Your 401(k) is qualified (by a section of the tax code (section 401(k)), meaning that the earnings on the account are not taxable until withdrawn. IRAs (individual retirement accounts) and Roth IRAs are also qualified.
- Joint: If you are married and both you and your spouse will own the account, you will open a joint account.
- Usually for spouses, you open a joint tenants with right of survivorship account (JTWRS). As it sounds, JTWRS accounts pass by law to the surviving account owner (right of survivorship) in the event of the death of the other account owner (spouses co-owning accounts is the typical example.)
- A tenants in common (TIC) account means that each person owns his/her share of the account which passes, at their death, via the terms of their will.
Once you have an account, you will need to deposit some money, access your account online, and select the investment(s) you want to buy. The brokerage houses (and the internet) make it pretty easy now.
Types of Investments
Stock: Companies issue stock to the public via an IPO (initial public offering) to raise money. After that offering of stock, investors who want to sell their shares do so on a stock exchange: New York Stock Exchange (NYSE) or NASDAQ. You can be a buyer or a seller if you have a brokerage account (Schwab, TD Ameritrade, etc.).
A few things to consider are:
- You don’t have to think about what stock exchange the stock trades on as the brokerage house manages all of that behind the scenes. You just click “buy” and next thing you know the shares show up in your account. There may still be some issues with restrictions on the quantity of stock you can buy. Round lots are 100 shares, so you may need a decent amount of money to buy a high-priced stock if it must be purchased in round lots; however, many round lot restrictions have been eliminated in the online brokerage world.
- You can buy shares in small quantities using www.computershare.com which manages the DSPPs and DRIPs for many U.S. companies that offer such plans. They let you buy small amounts of their stock, usually if you have set up an automatic monthly deposit into the account.
- Bonds: A debt instrument issued by a company, government, government agency (Sallie Mae, Freddie Mac, etc.), or utility raises money to fund their projects. Bonds have a term (period of time until repayment), an interest rate, and a set period for interest payments (monthly, quarterly, semi-annually, or annually).
- Mutual Funds: Mutual funds have a fund manager who sets the fund objective (health care growth stocks or high tech or alternative energy, for example), and then buys corporate stocks or other investments (bonds, options, futures, currencies) that meet the fund objective. Because mutual funds are a group of investments, the downfall of a single company doesn’t wipe you out.
- Open-end funds: With these mutual funds the purchase and sale of the fund is handled between the investor and the fund company (can be through a brokerage account though), and the fund simply issues more shares if demand is high. They are priced daily based on the net asset value (NAV) of the underlying holdings within the fund. If the fund gets too large, the fund may close to new investors.
- Closed-end funds: These are mutual funds where the fund company issues a fixed number of shares for sale to the public in an IPO similar to a stock issue. They are then traded (and priced) based on supply and demand rather than NAV.
- Exchange traded funds (ETFs): These mutual funds trade like stocks on an exchange. They usually track an index (say the S&P 500) or a commodity or other “basket of assets.” The expenses are usually lower for these funds than other mutual funds.
- Index funds: These mutual funds mimic a particular index, such as the Dow Jones Industrials or the Wilshire Total Market Index. They are typically low cost and are meant to let you invest in the index without actually having to buy every stock that makes up the index.
End of excerpt.
Next week, I’ll go more into mutual fund classifications and other investment considerations.
To your financial success!
