It’s important to remember that Social Security was never set up to serve as a primary source of income for retirees. The hope has always been that Americans will save and invest in their futures, leaving Social Security as a supplemental form of income.
Investing for retirement is a must for anyone who has designs on living a lifestyle in retirement that’s comparable with their preretirement lifestyle. If you are interested in starting to invest in your future, you will soon discover you have many viable investment options, including precious metals, real estate, bonds. and stocks.
Of the available investment options, stock investing is arguably the most popular. Why? The Returns on Investment tend to be good and, the stock market offers a large range of ways to invest.
In the following sections, the information is going to focus on helping you learn how to invest in stocks. After reading this information, you should have a basic idea of how to get started in your role as a stock market investor.
Opening an Investment Account
If you are going to start buying stocks, you will need to open a holding/trading account. Before opening an account, you will need to decide on what level of participation you want to have in the buying/selling of stocks for your account.
If you wish to be highly involved in the trading process, an online trading account would be a good option. By making trades on your own, the amount you would save on commissions could be significant. However, your inexperience as a stock trader would create a bit more risk. The way to protect yourself would be to learn how to interpret technical and fundamental stock analysis.
If you want help with the trading process, a brokered account would be the right way to go. By turning over many of the trading responsibilities to a professional broker, you would certainly benefit from their access to information and the expertise of others. The downside would be having to pay commissions, which could add up quickly if your investment account is active.
Investing in Stocks Through a 401K Account of IRA
If your employer offers employees access to a 401K investment account, this could afford you a great opportunity to invest in stocks while accumulating tax savings in the process. If your employer doesn’t offer a 401K option or you are self-employed, an IRA account would offer the same kind of investment options and benefits.
It’s worth noting that 401K stock investments aren’t typically made in individual stocks. Instead, investors are given access to a wide range of mutual funds. More on that below.
Types of Stock Investments
When you are ready to start investing in the stock market, there are several ways you can go. Here is a basic list of ways novice investors can play the market:
- Purchase/Sell stock in individual comanies
- Invest in mutual funds
- Buy/sell stock options
Purchase/Sell Individual Stocks
Purchasing stock in individual corporations is by far the most common form of stock investing. Consistently finding stocks in good companies that will consistently appreciate over time is an art form. It requires research to find potential movers and the discipline to hold purchased stocks until the right time to sell comes along. Hopefully, that will lead to a net profit.
When purchasing stock, investors are generally expected to purchase stock in standard lots of 100 shares at a time. Buying an “odd lot” of a stock is permissible, but the price will be a little bit higher due to logistical issues.
Most purchases revolve around common stock, which gives investors ownership and proportionate voting rights in the company of record. If an investor prefers to earn dividends per share, they can purchase preferred stock, which offers ownership but no voting rights.
Available stock prices are listed with a “bid” price and an “ask” price. The bid price is the highest price a prospective buyer is willing to pay at the moment of the quote while the ask price is the lowest price at which an owner is willing to sell at the moment of the quote.
Prospective buyers can enter a “limit” order, which limits the amount they are willing to pay, or they can enter a “market” order, which will result in an immediate purchase at the quoted ask price.
When ready to sell a stock, the process is reversed. The seller can enter a “limit” order and wait until another investor is ready to pay that price or, they can ensure an immediate sale by entering a market order. That will result in them getting the bid price.
If an investor has limited resources or time to track individual stocks, they can choose to purchase shares in a mutual fund. A mutual fund is a well-diversified portfolio of stocks that are owned and managed by highly trained fund managers. Profits from mutual funds are paid out through dividends or when the mutual fund’s shares increase in price due to the fund’s total valuation of all owned stocks.
Options are a viable method of stock market investing for investors who have an opinion on a stock’s prospects but lack the capital to purchase the underlying stock at full value.
While not recommended for novice investors, some investors enjoy playing options. An option is a temporary right to buy (call option) or sell (put option) 100 shares of an underlying stock. Options are listed by the expiration date (date the option must be settled) and strike price (the price at which the 100 shares will bt settled). At any time between the initial transaction date and the expiration date, the investor can buy or sell the option as is rises or falls in value in alignment with the underlying stock.
If all of this seems a little complicated, it is in the beginning. However, you will be able to learn as you go. Are stocks good investments? Historically, the overall market-driven by underlying stocks will increase in value by approximately 8% a year over any 10 years. That’s a decent Return on Investment.