Introduction to Investing
When you’re planning for short- or medium-term financial goals, it makes sense to put your money in a savings account or short-term certificate. These types of accounts work well when you need quick access to your money or are looking for guaranteed earnings.
For longer-term goals (more than 3 years away), you may want to start investing a portion of your money to try to increase your earnings.
Two investment categories that might already be familiar to you are:
- retirement savings accounts: These kinds of accounts help you save for retirement. You may be aware of 2 basic types: employer-sponsored (like a 401(k)) and individual retirement accounts (more commonly known as IRAs) that you open yourself.
You can contribute to one or both. They’re both tax-advantaged, which means that depending on the type of account, you’ll either be able to deduct your contributions on your tax return or you can put off paying taxes until you withdraw the money during retirement.
- college savings accounts: These accounts help you save for your child’s or your own education. You can choose a 529 or a Coverdell education savings account, depending on your income and how much time you’ll have to save.
Other forms of investment generally require the use of a brokerage account.
Many other types of investments require you to have a brokerage account. These accounts allow you to buy and sell stocks, bonds, mutual funds and more. You’ll need to decide on the type of account you’ll want to use. Are you most interested in keeping your costs low or would you prefer to have more personalized service?
Full-service brokerage account.
With a full-service brokerage account, you’ll have access to a variety of investment products. You’ll also have the guidance of a financial advisor who can help you develop a financial plan and build a portfolio based on your goals and needs. Full-service brokerage accounts are especially helpful if you’re inexperienced or aren’t comfortable making your own trades or other investment decisions. They’re generally paid by charging commissions on your transactions.
Low cost options.
If you’d prefer a lower-cost option, discount brokerages offer a more do-it-yourself approach. Their fees tend to be lower than those of a full-service brokerage account, but they don’t offer advice.
Some investment options let you invest without a financial advisor entirely. For example, you can invest through a Direct Stock Purchase Plan (DSPP), which lets investors buy stock directly from the company, although a minimum purchase amount is usually required. Or, you may choose an online investing tool. Some will allow you to choose between using a portfolio that’s already diversified for you or customizing your own.
Distinctive features of a brokerage account include:
- You can make investments in a wide range of financial products.
- You have the potential to earn higher returns than available with deposit accounts.
- There’s no limit on the amount of money you can deposit or hold, unlike a 401(k) or an IRA.
- Your money isn’t insured, which means that there’s risk of loss.
When to Use a Brokerage Account
Consider opening a brokerage account once you’ve made sure the rest of your finances are in order. For example, once you:
- have saved an emergency fund
- have started saving money toward your short-term goal
- are prepared to take on some risk in exchange for potentially higher returns
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