The Basics of Investing

Investing can seem intimidating to beginners, but with the right balance of risk and reward you can achieve your financial objectives.

Stocks are an investment vehicle in which you purchase shares of a company. They represent ownership in the business and can offer higher returns than other investments over time.

Some stocks pay dividends, which can help protect you against share price declines and add extra income to your portfolio.

Stocks

Stocks (also referred to as equities) represent partial ownership in a company and can be an important element of an effective investment portfolio. However, like all investments, they have their risks and may fluctuate dramatically due to market changes.

Stock investing can be a complex process, but it is an essential element of building wealth. Additionally, stock investing offers you the chance to diversify your assets and create an enduring retirement plan.

Becoming an investor begins with understanding what stocks are and how they function. After that, select the investment type that makes sense for you.

Different stocks offer various characteristics and benefits. Some can be classified as growth stocks, while others are value stocks.

Bonds

Bonds are an investment vehicle for debt, whose value can fluctuate based on interest rates and other factors. Bonds tend to be safer than stocks, though which type you select depends on your investment objectives and risk tolerance.

Stocks offer liquidity and a higher rate of return than stocks, but may not be suitable for everyone – particularly those with limited resources to invest in.

Bonds are loans issued by companies or governments with an established rate of interest. The issuer promises to repay you the face value of the bond at a certain date and make periodic interest payments throughout its tenure.

Bonds are issued by both governments and corporations, and can be acquired directly or through mutual funds or ETFs. As long-term investors look for ways to diversify their portfolios while counterbalancing stock market volatility, bonds may be an ideal choice.

Mutual Funds

Mutual funds are professionally managed portfolios of stocks, bonds and other securities. They can be an excellent way to invest for retirement, education or other financial objectives.

Mutual funds typically offer low investment minimums and a wide selection of products to meet various investment objectives, such as capital appreciation, wealth creation, income generation and tax savings. Some funds even provide automated monthly Systematic Investment Plans (SIPs) to encourage disciplined investing while building your retirement savings.

Funds are managed by professional money managers who use your money to purchase and sell shares within a mutual fund. They select companies they believe offer the greatest potential for growth and earnings.

In return, they pay you a percentage of the profits earned from shares’ dividend payments and capital gains – this is known as a “fund fee.” Be sure to read through the fund’s prospectus thoroughly before investing.

Taxes

When investing in stocks, bonds or mutual funds, taxes can be an important factor to take into account. This is especially true if you aren’t covered by an IRA, 401(k) or other retirement plan.

Investment income, such as dividends and capital gains, are taxed at different rates depending on how long you own the securities and your tax bracket.

Short-term capital gains are taxed at your ordinary income tax rate; long-term gains are taxed at a reduced capital gains rate.

Dividends are taxed as ordinary income (unless you own a qualified dividend-paying fund or receive distributions from a real estate investment trust). Interest earned on bonds, with the exception of municipal bonds, is taxed as ordinary income.

The IRS publishes Publication 550 to help you understand how to report and pay taxes on your investment income. However, if you have a significant amount of investments, consulting a tax professional is recommended in order to make sure you’re claiming all deductions and paying the correct amount in taxes.