Intro to Investing
When you’re planning in the short or medium term, putting your money into savings vehicles makes sense. You need quick access to this money and don’t want to lose it because of a few higher-risk investments going south at the wrong time. However, for longer-term goals (more than 3 years away), you may want to start investing a portion of your money to try increasing your returns.
Two of the largest investment categories include:
Retirement savings accounts: Ready yourself for retirement by contributing to one or more tax-advantaged retirement accounts such as a 401(k) plan or an individual retirement account (IRA). Plans such as a 401(k) are employer-sponsored and have deposits exempt from taxes, whereas IRAs are separate from your place of employment and may be tax-free either at the time of deposit or withdrawal, depending on whether you choose a traditional or Roth IRA.
College savings accounts: Save for your child’s or your own education with a 529 plan or Coverdell education savings account. Which one you choose will depend on your level of income and timeline.
Other forms of investment generally require the use of a brokerage account.
Many types of investments require a brokerage account. These accounts let you buy and sell stocks, bonds, mutual funds and more. Once you decide to open an account, you’ll have a choice between a full-service broker and a low-cost discount broker.
With a full-service broker, you pay commission fees to access a wider selection of investment products and work with an expert who can provide portfolio recommendations. If you’d prefer a lower-cost option, discount brokerages offer a do-it-yourself approach with fewer products.
Some investment options even let you invest without a broker entirely. For example, you can invest through a Direct Stock Purchase Plan (DSPP), which lets investors buy stock directly from the company, though there's typically a minimum required purchase amount.
Distinctive features of a brokerage account include the following:
The opportunity to earn higher returns than deposit accounts
Earnings aren’t insured, meaning money can be lost if your investment turns south
Investments can be made in a wide range of financial products
No limit to the amount of money you can deposit or hold, unlike an IRA or 401(k)
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 goals
are prepared to take on some risk in exchange for potentially higher returns
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