Start Investing in Stocks

     A stock is a slice of a company. By buying stocks you are actually buying a real piece of a company. Some stocks give you rights like voting on the company's future actions.

     ETFs and mutual funds are a basket of stocks that you can buy into. ETFs are traded on actual stock exchanges and are usually better for a taxable account. Mutual funds are not traded on stock exchanges and are REDEEMED directly from the brokerage. 

     The retail stock market essentially runs on the basis of people buying and selling stocks and thus stocks are very liquid. But sometimes, the company will sell stocks to individuals themselves. Usually in an IPO or secondary offering. 

    To start with, you always want to max out your tax advantaged accounts before your taxable accounts. Tax advantaged accounts include a Roth IRA, traditional IRA, or an HSA. An individual brokerage account is a taxable account. Note: A 401k is a tax advantaged retirement account as well that's sponsored by an employer. On this page, we will focus more on individual investment accounts. 

     A Roth IRA is an individual retirement account that allows you to contribute post tax income up to $6,000 a year or $7000 if you are of age 50 or older. To open a Roth IRA , your adjusted gross income must be less than $129,000 if single or $204,000 if married and filing jointly. The cool thing about a Roth IRA is that you can withdraw your contributions at any time but you can only withdraw the earnings out of a Roth IRA after age 59 1/2 and after owning the account for at least five years. Withdrawing that money earlier can trigger taxes and an 10% early withdrawal penalty. 

      A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. A traditional IRA's max contributions are $6,000 a year or $7000 if you are of age 50 or older. Its important to note, you can only contribute $6000 within a Roth and/or traditional IRA combined. There are no income limits to open and contribute to a traditional IRA. Tax-deferred growth means that when you withdraw your gains in retirement, you will pay taxes on it. You're also required to start taking distributions at age 72. (There are no required age distributions with Roth IRAs).

     A individual brokerage account is a taxable account. It's pros are that there is not a max contribution limit, there a lot less rules about taking money out (short or long selling taxes) and your investments are extremely liquid. The cons are that if you are short selling, you're going to pay your bracket of income tax on on the gains. Some people prefer to use a taxable brokerage account for more risky investments that one may not plan to hold long term or as an overflow to invest once you max out your IRA contributions.

My favorites brokerages to open the aforementioned accounts with are :

• Fidelity
• Schwab
• Vanguard                                                                       

     Before you start investing, I recommend, having your debts payed off and having a solid 3-6 month emergency fund. As a rule of thumb, you should only invest in things you understand and only invest money you are willing to lose entirely. Now that that's out of the way, I like index funds that follow the S&P 500 or total stock market.

     Index funds like VOO or SWPPX, follow the S&P 500 which consists of the 500 largest publicly-traded companies in the U.S., like: Microsoft, Apple, Google, Tesla, Exxon Mobile, Bank of America, Visa, and Coca-Cola. An index fund that follows the S&P 500 usually produces a ROI of 10% within a year. Since the S&P 500 was introduced in 1957, it has had 17 instances when it produced a negative return over a year. Which means the S&P 500 has a track record of producing a positive year ROI 73.5% of the time. But you must remember past performance of a stock doesn't indicate its future performance. You can learn more about the S&P 500 index past performance here.

     A fund that follows the total stock market like VTI or SWTSX , are also popular to buy and hold. These are funds that contain all the stocks in the stock market. Whereas the S&P 500 only has the top performing 500 companies the US (which are called large cap), the total stock market contains large, mid and small cap stocks. Investors see this as more diverse than the S&P 500. Because of the large cap overlap, you wouldn't want to invest in both (unless they are different retirement accounts). You can find out more about the total stock market past performance here. 

Here are the overall pro and cons to investing in index funds:

pros

• Lower risk through diversification 
• Low expense ratios 
• Strong long-term returns
• Ideal for passive, buy-and-hold investors 
• Lower taxes for investors 

cons

• Vulnerable to market swings & crashes
• Lack of flexibility
• No human element
• Limited gains

     Notice how I haven't mentioned single stocks but only index funds (ETFs and mutual funds). Single stocks can be risky because of how much they fluctuate daily. In general, the more risk you take on, the higher your return could be. Me personally, I don't invest in single stocks, I'm 100% SWPPX. I'd rather bet on a basket of the top 500 companies in the US (which are basically the top 500 companies in the world) than one single company. If the 500 top performing companies are doing bad, usually the entire US stock market follows. 

     When is the correct time to buy a stock, ETF or mutual fund is a common question. In general, being in the market will beat trying to time the "correct" time to buy. However, I would say be aware when your stock of choice is at all time high, perhaps, wait for a dip.

     Being consistent with buying and maintaining your time in the market are probably two of the most important things.