The Basics of Investing

So you’re thinking about investing? To many this can be considered a daunting task, I suggest breaking things down, taking it step by step. I’ll explain the different types of investments to make you more comfortable with making a decision. Let’s liken investing to a toolbox; every ones toolbox is different, depending on the type of work they do. Your job, in the world of investments is to pick your toolbox and fill it with the most useful tools. The real terms the toolbox is your portfolio and each tool a different investment, let’s get started. We will stay with the basics, once you have an idea of what route you’ll take, you can dig deeper into the specifics as to which particulars are right for you.

Account Types:

Individual – An individual account belongs to you and you alone. Think of it like your personal checking account, only you get to select stocks, bonds, ETFs, Mutual Funds, and more.

Joint – This account has all the same rules as the individual account, yet you can own it jointly with another individual. In the event you own this account with one other individual, this account would give each person a 50/50% ownership of the assets inside the account.

Traditional IRA– This is a type of retirement account. A Traditional IRA allows all gains inside the account accumulate TAX FREE. What this means is, as you realize gains in the account, you do not have to pay taxes on the gain. However, at retirement when you start to take distributions from the account, you will have to pay ordinary income tax on the distribution. The tax feature is what makes this a great tool. If you are not covered by a retirement plan at work, you can deduct the entire IRA contribution on your tax return, another key benefit to a traditional IRA. However, if you are covered by a retirement plan, your income will decide if you contribution is deductible or not. There is a catch; you are limited as to the amount you can contribute, as a millennial you can contribute up to $5,500.

Roth IRA – This is another type of retirement account, but it comes with slightly different rules. You do not get a tax deduction for contributions made to this account. However, all realized gains are not taxed, and any distributions ARE NOT TAXED. A very nice way to accumulate wealth….. if you qualify. The contribution limits are the same as a traditional IRA $5,500. But, the amount you can contribute to a Roth IRA is limited by your income. You can find details on these limits doing a quick online search.
There are some other minor differences between the Roth IRA and Traditional IRA. For example, Required Distributions and Beneficiary transfers, we won’t cover those topics here, but be advised on this when doing your research.

Investment Options:

Stocks: Stocks allow you to become part owner of the business in which you are buying. This entitles you to vote at shareholder meeting as well as receive any dividends or distributed profits from the company. The value of a stock fluctuates continuously. We’ve all heard the “buy low, sell high” approach; the goal is to choose a company in which you believe the stock price will grow. Later on, once you’re ready to sell you will hopefully make a nice profit. Keep in mind stocks come with no guarantees, therefore, you could lose your entire investment. Choose wisely!

Bonds: When you buy a bond you are in essence loaning money to a company or government. The company or government you loaned the money to will pay you an agreed upon interest rate and will eventually pay you back the amount you lent them. Bonds are generally seen as a safer investment alternative to stocks; however, different types of bonds come with different levels of risks. The safer the perceived bond is the lower the interest rate a vice versa.

Mutual Funds: There are multiple types of mutual funds. These funds are a collection of stocks and/or bonds. The client pays the manager of the mutual fund to invest your money in a wide variety of investments. All mutual funds have an objective; this can be helpful when you are building out your “tool box”. If you do not have the time and/or experience to select your own investments then a mutual fund may be a good option. Keep in mind; you will be charge a management fee by the company and/or advisor. Additionally, you may be charged what is referred to a ‘load’, always do your research before selecting a fund.

ETFs: This type of investment trades much like a stock and because of this are growing in popularity. They hold large baskets of stocks, commodities, or bonds. The objective of an ETF is generally to track an index; for example, the S&P 500 or Dow Jones. Over the last few years, new active strategies have been introduced to allow ETF investors a wide range of options outside of a traditional index. For the most part an ETF has higher liquidity and is a lower fee structure than a Mutual Fund.

Investing is an intricate world, with many moving parts. Hopefully this post had helped in your decision process. What next? Decide what your risk tolerance is and how to diversify accordingly, this will be our next topic because it deserves proper attention, so stay tuned.

For now decide which account type is right for you. This is very important as each is unique. Generally speaking Roth IRAs and Traditional IRAs are a good place to start as they come with nice benefits. Then look into the facts and specifics of different types of investment options. It doesn’t have to be one or the other, frankly, a lot of the times it’s a combination of all of them. After our discussion on risk tolerance and diversification you will have an idea on how this all fits together, making it easier to select your best route.