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You don’t have to be a genius to be reasonably successful in investing. You just need to know a few basics, form a plan, and be ready to stay in for the long haul. There is no guarantee that you’ll make money. And you’ll have to remember that there are no easy and fast ways to make lot of money. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to enjoy the benefits of investment.
What kinds of investment products are there?
There are quite a few, and you need to research the benefits, risks, and fees for each.
Investment products include: stocks, bonds, municipal bonds, mutual funds, exchange-traded funds (ETFs), annuities, certificates of deposit (CDs), money market funds, commodities, hedge funds, real estate investment trusts (REITs), international investing. Sound confusting? Well, actually, it is!
How the markets work
The stock market is where buyers and sellers meet to decide on the price to buy or sell securities, usually with the assistance of a broker.
Public companies: A key part of the American economy that play a major role in the savings, investment, and retirement plans of many Americans. If you have a pension plan or own a mutual fund, chances are that the plan or mutual fund owns stock in public companies. Like millions of Americans, you may also invest directly in public companies.
Brokerage accounts: A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased. A margin account is a type of brokerage account in which your brokerage firm can lend you money to buy securities, with the securities in your portfolio serving as collateral for the loan. Stock purchases short and long: Having a “long” position in a security means that you own the security. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A “short” position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value. If the price drops, you can buy the stock at the lower price and make a profit. If the price of the stock rises and you buy it back later at the higher price, you will incur a loss.
Types of orders
A market order is an order to buy or sell a security immediately. This guarantees that the order will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price.
A limit order is an order to buy or sell a security at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
A stop order, also referred to as a stop-loss order is an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or protect a profit on a stock they own.
Executing an order
When you place an order to buy or sell stock, you might not think about where or how your broker will execute the trade. But where and how your order is executed can impact the overall cost of the transaction, including the price you pay for the stock.
Trade execution isn’t instantaneous: When you push that enter key, your order is sent over the Internet to your broker–who in turn decides which market to send it to for execution–it does take time. And prices can change quickly. Investors may not always receive the price they saw on their screen or that their broker quoted. By the time your order reaches the market, the price of the stock could be slightly–or very–different.
Your broker has options for executing your trade: Just as you have a choice of brokers, your broker generally has a choice of markets to execute your trade.
Your broker has a duty of Best Execution: Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, your broker has a duty to seek the best execution reasonably available for its customers’ orders.
Should you ‘hire” yourself?
If you take the do-it-yourself route, go slowly and cautiously. Start by making sure your legal affairs are in order–you have a will and you have protected yourself from liability through appropriate insurance. Next make sure you set aside money for an emergency fund, money you can access quickly without fouling up an investment plan.
If you find a successful and experienced investor who is willing to be your mentor, consider entering that sort of relationship. But always use your common sense and remember that you are the boss.
If you want to hire an investment manager or advisor, choose carefully. Seek references from friends and relatives. Ask for references from lawyers and accountants. And an excellent rule of thumb: Never invest in anything that you don’t understand.
America Saves is a campaign managed by the non-profit Consumer Federation of America. It seeks to motivate, encourage, and support low- to moderate-income households to save money, reduce debt, and build wealth.
