Investing in stocks and bonds is an important thing to understand in order to grow your savings and wealth.
For novice investors, the thought of buying and trading stocks and bonds may seem overwhelming. However, investing in these assets can help you grow your wealth substantially and make sure that you're ready for retirement. While bonds are more secure than stocks, they also offer lower returns.
As you start to invest, you'll have to decide how much exposure you want in the stock market and how much in the bond market. We'll walk you through how to invest in stocks and bonds.
Open a Brokerage Account
The first step to investing in stocks and bonds is to open a brokerage account. You usually only have to open one account to execute both kinds of trades. Most major brokerages today are free to use.
You just have to open an account online. You might need to have a minimum amount of funds in the account to start trading. You will also have to check if there are any transaction fees.
Some accounts will charge you around $7 for each trade you make, but most brokerages have eliminated these commission fees.
You should also see if the brokerage also has physical locations as well as online ones and what their customer service is like. Especially when you're starting, you're going to want as much support from your brokerage as you can get.
The Easy Way to Invest
Becoming an involved, hands-on trader requires a significant amount of time and work. Most investors simply aren't interested or able to dedicate that much energy to research – and there's nothing wrong with that.
If you're unable to dedicate a lot of time to investing, you should consider investing in index funds. Some of the best kinds of funds are low-cost, market-based index funds. For example, you can buy shares of a low-cost fund that tracks the S&P 500.
Investing in a fund like that one will mean that your portfolio essentially delivers the same returns as the stock market overall. Vanguard pretty much invented the index fund, and they now offer a variety of funds that track all sorts of indexes.
Investing in these kinds of index funds are also useful when you're using an IRA.
You can also invest in sector-based index funds. These are funds that follow specific industries like tech or energy. They allow you to be diversified while still taking a hands-off approach.
When it comes to bonds, you can invest in ETFs and mutual funds that track the bond market. Investing in index funds means that you can become profitable without having to do a whole lot.
The More Complicated Way to Invest
Index funds are great, but they're relatively limited in how much profit they can bring you. For those who are looking to take on more risk and potentially higher returns, then investing in individual stocks and bonds may be the better move.
When you purchase a specific stock, you will essentially be able to make two different kinds of orders. They are the "limit" order and the "market" order.
A limit order tells the broker that the stock can only purchase at the price you specify or cheaper. If the stock never reaches that desired price, your order will not be filled. A market order tells the broker to purchase the stock as soon as possible.
Today, a stock transaction can usually transact in a matter of seconds. For stocks that you're planning on holding onto for a long time, limit orders tend to be more advantageous.
If you want to buy a specific bond, you can do so through your brokerage. Most brokerages sell municipal bonds, corporate bonds, and treasury bonds.
A bond is a loan to the US government or other entities. In return for loaning your money, you'll receive interest over a specified period. Purchasing bonds through brokerages can get kind of confusing.
An easy way to purchase bonds is through the US Treasury Department. You can buy new bonds by visiting the website for Treasury Direct. The treasury will sell you bonds at market value.
The two most popular investment strategies are growth investing and value investing. A growth investor looks for companies that are growing quickly and may not even be popular yet. Many startup tech companies are growth plays.
Investors usually ignore traditional valuations for these kinds of stocks and instead focus on the potential of the company. Although it's risky to invest in growth stocks, they can also bring high rewards to investors who are willing to stick with them.
A value stock is one that is probably not as quick-growing as a growth stock. Value stocks are based on more traditional fundamentals and are used by investors who want some risk exposure but not a ton.
The Importance of Knowing How to Invest in Stocks and Bonds
While it may seem daunting at the start, learning how to invest in stocks and bonds can help you grow your wealth and get prepared for retirement. Before investing, you must pick a strategy and understand all of the pros and cons. Investing can be fun and easy, but it still takes some attention and research, no matter how involved you decide to be.