Investing may seem overwhelming at first, but if you break it down and learn the basic terms, you make informed choices. There is a lot to learn, but once you know the basics, it’s easy to learn advanced investing techniques as you gain experience.
Taxable accounts are basic investment accounts that anyone can open. You buy and sell stocks, bonds, mutual funds, ETFs, or options. Anytime you earn a profit (capital gain), you’ll owe taxes like you would on your regular income.
Tax-advantaged accounts are retirement accounts. You contribute funds either pre-tax or after-tax. If you contribute pre-tax (IRA), you pay taxes on the contributions and earnings when you withdraw them in retirement. If you contribute after tax (Roth IRA), your contributions and earnings grow tax-free.
This is the combination of investments you include in your portfolio. For example, if you invest in stocks and bonds, with 50% in stocks and 50% in bonds, you have a 50/50 asset allocation.
Stocks are an investment in a company. As the company does well, the stock increases as do your profits. If it does poorly, the stock value decreases and you may lose money.
Bonds are a loan to a company or the government. You earn a predetermined amount of interest if you keep the bond through maturity. Government bonds are less risky than corporate bonds.
Multiple investors pool their money together to invest in a portfolio of assets managed by a mutual fund manager. Each mutual fund could have hundreds of stocks or bonds in it. The mutual fund manager handles buying and selling the assets to keep the portfolio on target.
Exchange traded funds are just like mutual funds (baskets of securities) except they can be traded throughout the day. Mutual funds only trade at the close of the market. ETFS usually have lower expense ratios than mutual funds.
An expense ratio is the cost to run the mutual fund or ETF. It’s a percentage of your investment and pays the fund managers handling the investment. ETFs have an average expense ratio of 0.2% and mutual funds between 0.5% - 1%.
Popular for retirement funds, target date funds are portfolios of securities targeted to reach your goal. For example, if you plan to retire in 2035, you may invest in a 2035 target date fund. The portfolio will contain aggressive assets early in the portfolio and slowly move toward more conservative investments as you get closer to 2035.
Investing can be a great way to grow your earnings and reach large financial goals. Familiarize yourself with the basic terms and learn how to invest like a pro. Today anyone can invest even with a few dollars. It just takes the courage to get started and the rest falls into place. Figure out where you are comfortable with investing and make the most of your money.