How to Invest Your Money

Why Invest?

• If you keep your money in a savings account: It won’t grow at rates that keep pace with inflation, and you’ll end up losing purchasing power each year.
• If you invest your money instead: It can grow at rates that do beat those of inflation, which can enable you to increase your purchasing power over time.

Types of Investments

• Stocks: An investment in a specific publicly traded corporation, such as Google or Pepsi. Publicly traded companies issue shares of their stock to the public—each share represents a fractional percentage of ownership in the company.
• Bonds: Loans that investors make to corporations and governments. The corporation or government then pays a fixed amount of interest to the bond investor over a set period of time, called a term. At the end of the term, the investor also gets back the original investment amount, called the principal.
• Mutual funds: Investments that pool money from many investors and invest it in a specific set of stocks or bonds. A type of mutual fund called an index fund attempts to mimic the performance of a market index, a group of investments that serves as a benchmark for the performance of other investments.
• Exchange-traded funds (ETFs): Funds that, like index mutual funds, track indexes—but are bought and sold during the trading day like stocks.

Should You Hire an Investment Advisor?

• Decide which type(s) of accounts you need
• Determine your risk tolerance
• Build a diversified investment portfolio

Should You Start Investing?

1. Review your savings goals: Consider starting to invest only if you have already established an emergency fund and have achieved your other major savings goals, such as saving for a first home. Most people don’t start investing substantial amounts of money until they own their own home. One exception to this is retirement investing: most people start investing for retirement as soon as they start working—usually through IRAs or workplace-sponsored retirement accounts, such as 401(k)s.
2. Consult your budget: In general, you should begin investing only if you have at least $300–500 left over each month after covering all expenses, including amounts that you’ve reserved for specific savings goals. If you have no surplus, or a surplus of less than $300, you shouldn’t be investing at this time.
3. Save for an initial deposit: Most investment accounts (explained below) require an initial deposit of $1,000 or so. If you don’t have that cash on hand, you’ll need to create a savings plan to help you save up.
4. Set up an automatic investment plan: Once you’ve begun investing, generally it’s best to invest your entire surplus each month. Most banks and investment firms offer automatic investment plans in which you can have a set amount of money transferred directly into your investment account at set intervals, such as with every paycheck or at the end of each month.

How to Get Started Investing

1. Choose a type of investment account
2. Decide whether to work with a broker or brokerage firm
3. Set up an investment account
4. Make investments

Types of Investment Accounts

• Brokerage accounts: Also known as taxable accounts, these accounts enable you to invest and withdraw any amount of money at any time for any purpose. You must pay taxes on all dividends and profits you receive.
• Retirement accounts: These accounts allow your money to grow without taxation on dividends or investment gains, which can significantly improve returns. But retirement accounts have some built-in restrictions: you can add only a certain fixed amount each year to these accounts and face penalties if you withdraw money early (usually before age 59 1/2). The most popular types of retirement accounts are Traditional IRAs, Roth IRAs, 401(k)s, and 403(b)s. For more on retirement plans and retirement investing, see the Quamut guide to 401(k)s & IRAs, available in Barnes & Noble bookstores and online at www.quamut.com.

College Savings Accounts

Brokers and Brokerage Houses

• Full-service broker: An independent professional or a full-service agent employed at a brokerage house. A broker works with you one-on-one over the phone or in person to make investment decisions, and places orders on your behalf to buy and sell investments. Brokerage houses that employ full-service brokers include A. G. Edwards & Sons, Merrill Lynch, and PaineWebber. You can find independent local brokers by searching online or in your yellow pages.
• Brokerage house: A firm that provides investment services to individual investors. Rather than provide one-on-one investment advice, most brokerages allow you to place your own orders online or over the phone to buy and sell investments. They also often provide proprietary investment-related data and research reports to help you make your own investment decisions. Some of the most popular brokerages are Fidelity, Charles Schwab, Vanguard, and TD Ameritrade.

Commissions

How to Set Up an Investment Account

1. Choose a brokerage house or a full-service broker with whom you’d like to open an account.
2. Fill out an application for the type of account you’d like to set up. All investment account applications consist of a few forms on which you provide your name, address, Social Security number, and other basic info.
3. Make an initial deposit into your account via cash, check, or wire transfer. The amount required to establish an account varies but usually starts at $1,000.