What is the stock market?
- The stock market is made up of a network of exchanges with stocks listed on specific exchanges
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Market indexes track performance of a group of stocks and are used as a benchmark for performance
- Common indexes: S&P 500, Nasdaq, Dow Jones Industrial Average
- Many factors can affect whether the stock market is up or down, so it is very hard to predict changes to stock values
What are stocks and bonds?
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Stocks are a way for companies to raise funds and for investors to potentially grow their money
- When you purchase stock, you purchase a small piece of that company (a share)
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Common Stock pays dividends but are not guaranteed and the amount is not fixed
- Dividends: regular payments to stockholders
- Preferred Stock pay fixed dividends and holders are first to get paid and receive a liquidation of assets, over other stockholders, if company goes bankrupt
- Within those categories stocks are further broken down into various sectors
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Bonds are debt with an agreement to pay interest while the company uses the money
- Have maturity dates where principal investment is paid back
- Good for investors who want income (in the form of interest payments)
Stock and Bonds vs. Mutual Funds
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Individual stocksor bonds:
- Takes significant time to do proper research on individual stocks and build a well-diversified portfolio
- Additionally, trading costs can be higher for an individual investor
- Learn how to research stocks efficiently if you really want to get into individual stocks
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Mutual Fund & ETFs: Group of stocks and/or bonds professionally managed
- Easier to build a diversified portfolio
- Generally, have steadier investment returns as the return is not reliant on a single stock or bond
- If you have a 401(k) you are most likely already investing in stocks and bonds through mutual funds available in the plan
What to Consider Before Investing in Stocks :
- Put in enough money to a 401k to get the employer match and maximize the value of tax deferred assets
- Make sure you are paying for adequate health insurance and consider other coverage such as disability and life insurance depending on your personal situation and other employer benefits you have available
- Pay off any debt you have or have a plan to pay off that debt in coordination with other goals
- Start an emergency fund- you don’t want to have to sell stocks at a loss to pay for an emergency
- Learn the basics of investing instead of just picking stocks that look interesting
You’ve Decided to Invest, Sit Down and Make a Plan :
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Determine your reason and timeline for investing
- Are you investing to bulk up your retirement funds that you won’t need for 30 years? Or maybe trying to save for a house that you hope to purchase in ten years? Long term goals are usually the best when dealing with the stock market
- If you have a short-term goal that you really need money for, the stock market may not be the best option
- Assess your risk tolerance (this should correlate with your timeline)
- Are you the DIY type or do you want someone else to manage the process?
- Diversification is the key to success: build a broad portfolio (either on your own or with the help of an advisor) by investing in different stocks, across different sectors and investing in mutual funds and ETFs
- Have patience!
For Short Term Goals (3-5 years) Consider:
- Individual bonds
- CDs with maturity dates less than 3-5 years
- Money Market Accounts
For Long Term Goals Consider:
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A diversified portfolio including Cash, Bonds, and Stock Funds
- Amounts in each asset class will vary depending on your timeline and risk tolerance
Take Away Note:
- If you have read over what to do before investing and decided that you have enough extra funds to invest in the stock market, start researching now! The stock market is complex and learning as much as you can will help you and your investments in the long run.
