You are at a point in your life where you want to start building your own investment portfolio. You want to learn how to invest in stocks but are not even sure how to begin. There are three ways to begin investing: using a 401K or 403b plan, an IRA and a brokerage account.
Retirement plans such as a 401K or a 403b are offered through an employer. It is a special plan that you fund through payroll deductions. What makes these plans special is that the money used to invest in the plan is pre-tax dollars so you do not pay any income tax on the money until you withdraw it from the plan. Within the plan, your employer might offer several investment options such as stocks, bonds and mutual funds.
An Individual Retirement Account, or IRA, is another vehicle for retirement savings that offers favorable tax implications. Various types of investments can also be held in an IRA including stocks, bonds and mutual funds. You can open an IRA account at most any financial institution such as a bank, a brokerage firm or a mutual fund company like Fidelity and Vanguard.
You can open a brokerage account with either a local brokerage company or an online brokerage company. You pay a commission to the broker when you buy and sell investments. An online discount broker may charge fees as low as $5 per transaction while the fees at a traditional broker can be much higher. However, with a discount broker you make your own investment decisions and do your own research. A traditional broker can provide you services such as investment advice and financial planning. Opening a brokerage account is a simple process at most financial institutions.
If you will be investing through an employer-sponsored plan such as a 401K or a 403b, your investment options will be limited. Your employer should provide you a list of the investments, descriptions of the investments and information on their historical performance. Many employers arrange seminars for their employers with the financial institution that is monitoring the plan. These seminars are an excellent way to learn about investing. It might even be possible to meet one on one with an employee of the financial institution to discuss your goals and risk factors. Be sure to take advantage of these seminars and one-on-one counseling sessions if they are offered.
If you will be investing on your own, through your own IRA or brokerage account, you will have to do your own research. The most important thing to do before investing in stocks is to read about investing. Books like Investing For Dummies or The Complete Idiot’s Guide to Investing are good places to start. There are many decisions that should be made before you buy your first stock. One of the most important is whether to invest in individual companies by buying stock in those companies, or by purchasing a mutual fund, which pools the investors’ money and buys stock in many companies.
If you want to buy stock in individual companies, there are documents that help you decide if a particular company is one that you want to invest in. Every company must file a 10K form with the Securities and Exchange Commission on an annual basis. Quarterly the companies file a 10Q. Both are extremely helpful documents for researching a company. You should request a proxy statement from the company, which will give you information about management pay, shareholder proposals and the members of the Board of Directors.
Obtain a copy of the latest annual report and read the officers’ statements for a feeling about how they picture the status of the business and industry. Included in the annual report should be the company’s latest financial statements, which you will want to take a close look at. If necessary, spend some time learning how to read and interpret the Income Statement, Balance Sheet and Cashflow Statement. Investigate the company’s financial history. Often this can be found on-line and is available for a fee from companies such as Morningstar and Moody’s.
Many beginner investors buy stock in industries they are familiar with. For instance, a computer engineer might investigate buying stock in Intel, IBM or Seagate. Take a look in your kitchen cupboards. You may find that the same company, such as Proctor and Gamble, makes several cleaning products you use. The same can be said about food items.
If you find the required research for purchasing an individual stock overwhelming, a good option is purchasing stock through a mutual fund. Mutual funds are professionally managed and they are available through many well thought of companies such as Fidelity, Vanguard and T-Rowe Price. Yet even the purchase of a mutual fund will require some reading and research.
Different mutual fund companies have different minimum investments and some even have different minimum investments for the various funds they manage. Typically, if the investment will be held as an IRA, the minimums can be as low as $500. Within each company are a multitude of mutual funds. Some invest in a specific industry, such as real estate, called REITS. Others funds are geared to the investor’s retirement age. Some invest in fixed income investments that typically have low risk while others invest in high risk industries. You can invest in mutual funds that only buy U.S. companies or you can invest in mutual funds that buy stock in companies located in Asia.
If you are considering investing in a mutual fund, call the mutual fund company and ask for a prospectus where you will find information about the fund’s goals, fees and historical performance. Read as much as you can about the sector you are thinking about investing in.
Learning how to invest in stocks can be a long process and harder for some than others. It is important to remember that, under the worst circumstance, this is money that can be lost so the time spent learning about investing and the companies or industries you are considering investing in is time very well spent.