Becoming Familiar with Different Investment Products
There are many different ways you can invest. Some of the most popular investment products you can choose from are stocks, ETFs, options, cryptocurrency, and retirement plans. Before you begin, it's a good idea to familiarize yourself with the different investment products to know what's right for you.
This is generally the most well-known type of investment. Sometimes referred to as equities or shares, you take a small ownership in a publicly traded company when you purchase a stock. The main ways in which you can turn a profit with stocks are by capital gains and dividends. Capital gains are based on demand from investors, and dividends depend on the earnings made by a company.
Capital gains are made when you sell a share for higher than the amount for which you purchased it. The prices of securities fluctuate throughout the trading day as they are bought and sold, so if you buy a share at a certain price, you can sell it later on at a different price in hopes of turning a profit. If you sell at a lower price than you paid, this is a capital loss.
Dividends are an amount of a company's earnings paid to a shareholder at the discretion of the firm. These can be issued in cash, or you can choose to reinvest. Retirees sometimes choose to use dividends to earn an income. When a stock pays a dividend, this is usually referred to as an income stock.
Stock performance is affected by the overall performance of the stock market. The economy plays a significant role in market prices, as things like inflation, interest rates, and even politics can increase or decrease price values. This results in the market constantly fluctuating, and the prices are never predictable. Having a diverse portfolio can potentially help you increase your odds of yielding a profit, though there's no guarantee that any investment you make will generate income. Every investment comes with its own risks that you need to acknowledge before investing.
Exchange-traded funds (or ETFs) consist of many investments that track a market index. With an ETF, you can trade many securities at once. These tend to have lower fees than other fund types.
With an ETF, the provider for the fund holds ownership of the underlying assets. But, investors might be able to acquire reinvestments or dividends from the stocks within an index if they have an ETF that tracks a stock index. They do, however, tend to trade at market prices different from the underlying asset, and long-term returns can differ, as well.
It works like this: a provider for an ETF will develop a group of stocks, bonds, etc. and label them with their own ticket. Investors can then purchase a share of it, and buyers or sellers can trade the ETF just as they would any other stock.
Some benefits of ETFs include the ability to create a diverse portfolio in a way that can be simpler than with other investment products, and tax benefits, as you aren't subject to capital gains taxes. On the other hand, risks include (but are not limited to) high taxes, ETF shutdown, and trading costs—it's necessary to consider all risks and benefits before committing to investing in an ETF.
An option is a contract that provides buyers with the right to purchase or sell an underlying asset at a certain price on or before its expiration date. The value of an option is typically derived from an underlying stock and is usually made up of about 100 shares representing the asset. Many people use options for hedging to potentially reduce risk at a low cost, or for speculation, as it provides leverage.
With options, you have to get two things right—the direction and the timing. The underlying stock price has to move in the direction that you anticipate within the period that you expect or else the option will lose value quickly and eventually expire worthless.
Options trading tends to have more moving parts than the average stock trade, so if you're new to options, it might be a good idea to have a decent level of experience trading stocks before getting started.
It's important to have a financial plan in place for when you're ready to retire. Many may opt for an IRA (individual retirement plan) or Roth plan if they don't have access to one otherwise (like a 401k), or just desire an additional way to save for the future.
A traditional IRA is available to anyone who has a taxable income. If you don't have an employer-sponsored retirement plan, any contribution you make to your IRA is typically tax-deductible. When you begin making withdrawals, the distributions are taxed as regular income.
A Roth IRA is available for those who have a taxable income, but make less than $144,000 a year, or, if filing with a spouse, less than $214,000 a year. With this plan, all earnings and withdrawals are tax-free; plus, you're able to withdrawal funds prior to retirement if necessary.
Options trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. Losses can potentially exceed the initial required deposit. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options. Relevant regulatory and exchange fees may apply. All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing.
To make this easier, you might want to familiarize yourself with some basic stock market vocab words before taking the leap into buying and selling stocks.
Since Bitcoin's development in 2009, cryptocurrency has continued to increase in popularity over the years.
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