Investing seems largely out of reach to many people (and Wall Street has especially shut out women). But it doesn’t have to be inaccessible or scary if you have basic knowledge to bolster your confidence. Here, we build on what you learned in our first installment of basic investing questions so you can start growing your net worth.
1. WHAT ARE BLUE-CHIP STOCKS?
Blue-chip stocks are stocks from public companies that have strong reputations, often household names like Microsoft and Exxon. Blue-chip stocks come from companies with demonstrable ongoing success that typically deliver good returns for their shareholders over time. But don’t let that fool you into thinking that these companies are infallible or unaffected by the market at large. They, too, can have bad quarters or bad years. But overall, blue-chip stocks are often seen as solid bets.
2. WHAT’S DAY TRADING? IS IT FOR ME?
Day trading is pretty much what it sounds like: buying and then selling stocks (or other financial instruments, like bonds or mutual funds) in the same day. In general, day traders make their money by investing large sums and taking advantage of small fluctuations in stock prices. These investors are also called “speculators,” since their primary goal is to turn a quick profit.
Day trading is risky and not for the faint of heart. For a long time, it was primarily something done at big financial firms or by full-time, professional speculators. Today, with the rise of electronic trading, more hobbyists are giving it a go. That said, it’s probably not the right place for a beginner investor to get started — and it also comes with big tax implications. Whatever you do while investing, don’t be lured by the idea of “beating the market.” Studies show that it’s essentially impossible.
3. WHAT IS HEDGING?
Sometimes people talk about hedging as a form of “insurance” for an investment (think of the expression “hedge your bets”). A perfect hedge would take 100 percent of the risk out of a portfolio, but in the real world, that’s more of an ideal than something that can actually be achieved.
One of the ways that people go about hedging is by buying derivatives, which are investments designed to balance risk. An investor might put some of their investment into derivatives to balance out the risk of their portfolio. If you’re concerned about your level of risk, you can bring this up with your financial advisor.
4. SHOULD I PAY OFF MY DEBT BEFORE I INVEST?
The paying off debt vs. investing question comes into play only if you have extra cash on hand. That means you’re paying at least the minimum on your debts, covering your other expenses and still have money left over.
If you do have extra money, first consider how much your debt is costing you by finding exactly how much you owe and what the interest rates are. Use a debt repayment calculator to crunch the numbers on how much interest you will pay over time on your debt. And consider whether you’ll receive a tax deduction for paid interest that saves you even more, like in the case of student loans and mortgages.
Next, decide if the potential return on your investment outweighs the cost of your debt. For example, investing money in your 401(k) that you project to earn a 7 percent return makes investing more attractive than paying off a student loan at 4 percent interest. You still come out ahead if the investment return you’re expecting comes to fruition. However, the credit card interest — which is likely much higher — pales in comparison.
5. I HAVE SOME MONEY TO INVEST. WHERE SHOULD I START?
When getting started with investing, it’s a good idea to educate yourself on the options available and narrow down your goals. If you work at a company with a 401(k) or 403(b) or similar retirement plan, you should strongly consider investing in these first. This is especially true if your company offers a match of any type, since that’s free money.
It’s smart to max out these types of accounts before you start to consider other types of investment accounts. In 2018, the max you can contribute to a 401(k) is $18,500 ($24,500 if you’re 50 or older). In 2019, that changes to $19,000. Then consider an IRA, since like a 401(k), these types of accounts have special tax incentives attached to them (read: they can save you money). The max you can contribute to an individual IRA in 2018 is $5,500 — $6,000 in 2019 — and $6,500 if you’re 50 or older.