How to Invest in Stocks
Learning how to invest in stocks will enable you to fund your retirement, increase your personal income, and ensure your financial future. This article examines what stocks you can invest in, how you can invest in them, and what you need to know before doing so.
Ways to Invest in Stocks
There are several ways to invest in stocks. Here are some of them:
Traditional IRA – It’s important to know about the traditional individual retirement account (traditional IRA). Through an IRA, investors can make tax-deductible contributions and invest in mutual funds, bonds or stocks. Account owners can withdraw funds penalty-free once they turn 59 ½ years old. Early withdrawals incur a 10% penalty. Investors are required to begin withdrawals at the age of 70 ½.
401k Plan – A 401k plan is a retirement account funded via payroll deductions prior to taxes. Created in 1981, 401k funds are not taxed on interest or dividends until they’re withdrawn, and they can be used to invest in mutual funds, bonds and stocks.
403b Plan – A 403b retirement plan is often used for public school employees, self-employed religious leaders, and those who work for tax-exempt organizations. They are similar in function to 401k plans.
Roth IRA – Created in 1997, Roth IRAs allow annual contributions to a retirement fund. Your income must be below a certain level to qualify, and the money contributed is not tax-deductible. Early withdrawals are not penalized. There is no required age for withdrawals.
Simple IRA – More affordable than many retirement plans, a Simple IRA (also known as the savings incentive match plan for employees) is an excellent option for self-employed individuals or small businesses who don’t offer retirement plans.
SEP-IRA – Also referred to as the simplified employee pension IRA, this retirement plan is an affordable and easy retirement option for employers and employees alike. SEP-IRAs offer several advantages:
- No paperwork has to be filed with government agencies.
- Contributions to a SEP-IRA are tax-deductible.
- Yearly contributions can be changed or halted.
Brokerage Account – This type of account secures a professional broker to buy or sell mutual funds, stocks or bonds on your behalf. You are charged a transaction fee for each transaction, and these transaction fees can range from under $10 to hundreds of dollars. You can choose between traditional brokers or discount brokers, and this will determine the size of the commission. Discount brokers do not offer advice to their customers, while traditional brokers do.
DRIP – A dividend reinvestment plan, or DRIP, allows the dividends of the investor to be reinvested in the equity of the company. Whether you choose to reinvest your dividend income or receive it in cash, you’ll still have to pay taxes on it each year. In many cases, participating in a DRIP is free from commission fees.
Types of Assets to Invest In
When investing in stocks, there are three types of investment opportunities. Each is detailed below.
Common Stocks – When you buy common stocks, you are buying a tiny piece of a business. If the business increases in value, so does your stock. The opposite is also true. Many day traders, as well as long term investors, buy and sell common stocks.
Preferred Stocks – A mixture between the bond and the common stock, these preferred stocks receive first priority on their guaranteed dividends. This means that the preferred dividend will be paid prior to common stockholders receiving their money. During times of bankruptcy, the preferred stock is second to bonds, but it still takes priority over common stockholders. To make up for this advantage, preferred stocks offer limited financial upside to investors.
Mutual Funds – For those who want to know how to invest in stocks, another vital area is the mutual fund. Providing an easy way for anyone to invest, the money placed in a mutual fund is then taken by a fund manager and re-invested in various stocks, bonds, and other securities.
Before you begin investing in stocks, it’s wise to perform stock research. When researching stocks, here are the most important items to look at to determine investment potential.
Annual Report – An annual document written by the Chairman and CEO, this details how the high-ranking members of a company view the state of their business.
The 10K – Filed annually with the SEC (Securities and Exchange Commission), the 10K explains how a company makes its money, its level of debt, current lawsuits, financial policies and accounting policies. This document contains all the information that a potential investor could want.
The 10Q – Filed at the end of each quarter, the 10Q is a shorter (and simpler) version of the 10K.
Proxy Statement – This document includes matters that stockholders will need to vote on, bios for the current directors, income of the CEO and other executives, and the number of shares owned by the executives and directors.
When learning how to invest in stocks, there are also three financial statements that you’ll want to become familiar with.
Balance Sheet – This provides an investor with details concerning a company’s net worth, liabilities, and assets.
Income Statement – This document is distributed to investors and details the earnings of a company over a period of time.
Cash Flow Statement – This important document is concerned with the flow of cash in and out of a company. If you want to learn about the short-term viability of a potential investment, this is a good place to start.