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Investing can be filled with complicated investments, fancy terms, and acronyms galore. Today I want to take a beginners look into what “invest in the stock market” really means and different ways you can get started.
The stock market is where stocks and bonds are publicly traded.
The term “stock market” often refers to one of the major stock market indexes, such as the S&P 500 or Russell 2000. Because there are so many stocks these indexes include a section of the stock market to represent the whole of the market.
Analogy might be we go to the “food market” but rather we shop at Costco or Wal-Mart for our food, which acts as a market for much of the food we buy. Each store has a wide variety of food for sale but does not encompass all food for sale but rather a section of food.
For more and probably better stock market analogies check this out, but please come back I need you!
There are a few ways to invest in the stock market depending on where you are in your financial journey and your appetite for risk.
If you are looking to invest in the stock market there are a few investment accounts that will allow you to do just that.
Since the days of pensions have mostly gone away, today we are responsible for handling our retirement. Insert your friendly employer sponsored 401(k).
This type of account most commonly allows you to purchase a group of stocks like a mutual fund or index fund. Although some companies have individual stock (s) of the company you work for available for purchase as well.
When saving for retirement there are always tax advantages. The tax advantages are either saving taxes on the way in like a 401 (k) or on the way out like a Roth 401 (k).
Depending on your employer sponsored 401 (k) some benefits could include a company match based on a percentage of your contributions as well. Some like to call this “Free Money”, I refer to it as my “Free Bonus”.
As you will find with tax deferred and tax advantaged investment vehicles like the 401 (k) the IRS allows only a maximum contribution, currently $19,500 as of this writing. The premise is to keep higher salary employees from benefiting more than average salary workers.
Not all companies offer a 401 (k) and everyone needs an investment friend to hang out with. Meet the individual retirement account (IRA) which is usually opened at a brokerage company like Vanguard or Fidelity, my personal favorites.
This account allows you to purchase an array of investment products such as individual stocks, mutual funds or index funds. There is even more but let’s keep things clear and simple today.
By opening an IRA your investment choices are almost unlimited compared to your company’s 401 (k) which is limited to what your 401 (k) service company provides.
When saving for retirement there are always tax benefits. The tax benefits are either saving taxes on the way in like a traditional IRA or on the way out like a Roth IRA. In this case how much you make factors into what’s available to you.
As you will find with tax deferred and tax advantaged investment vehicles like the IRA, the IRS allows only a maximum contribution, currently $6,500 as of this writing.
The premise in this case seems to equate to giving average salary workers a tax advantage today and high income earners paying taxes today.
A brokerage or taxable account as this is often called is an investment account that on the surface is an account to buy and sell stocks of all kinds.
By opening a brokerage account your investment choices are almost unlimited even including products I’m not very familiar with like options, foreign exchange, and futures.
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With a brokerage account the general use is less about retirement and more about building wealth. The account does not offer any tax deferred or tax advantaged savings itself like the 401 (k) or IRA, but it does offer tax benefits.
For example when you sell a stock after holding the shares for a year or longer, the profit is taxed at a long term capital gains tax rate of 0%, 15%, or 20% depending on your income rather than your current tax rate. Less taxes means more profit.
There are many more tax benefits to investing in a taxable brokerage account. So many in fact I hire a CPA to handle our taxes every year and I recommend the same.
Tax deferred and tax advantaged investment vehicles have there limits. With a taxable brokerage account the amount you can put in is UNLIMITED.
Investing is the key to wealth in my humble opinion. We all want our money to grow over time and investing in the stock market is one of the key ways.
If you want to learn even more about the stock market check out the Netflix documentary below.
Moving forward make sure to balance your investments with where you are on your financial journey and your tolerance for risk. This will help you find the right investment style for you.
As a financial coach at Even Steven Money I can offer more guidance about your investment strategy. If you want to know more about your options, schedule a Discovery call by clicking on the link or select the date and time that works best for you in the calendar below.