By Debra Avara
Can you explain investing and the stock market like I’m five? Or at least like I’m a new college student?
Wow – that is a loaded question. And the simple answer is no.
Investing in the stock market is not something to be done lightly. You must start by learning.
You need to understand what a Roth IRA is; the difference between Mutual Funds and Bond funds; load funds vs. no load funds; or are you talking about straight out buying stock?
You need to understand the difference between online brokerage houses (Vanguard, Fidelity, T. Rowe Price, etc.) vs. walk in and sit down with a broker like Merrill Lynch, Edward Jones, etc. Are you going to do it yourself or hire a financial planner?
As a student, with (probably) limited income, I would recommend doing it yourself. If you hire a financial planner, you have to pay them. Also, I would recommend an online broker – also cheaper. Vanguard recently reduced their fees that they charge to an unbelievably low rate. When you use an online broker, you don’t pay them a fee to take your money (unless you are buying a fund out of their own lists), and they don’t charge you when you take your money out. They do charge an annual percentage rate to manage your money, but they all do that. So finding a good fund with low rates is a good place to start.
If you have a job, you may qualify for your company 401k. This too is somehow invested in the stock market. Long story short, you contribute to your 401k, pre-tax, it grows, and when you retire and take it out, you then pay tax on it.
If you have income, you qualify (with some restrictions) for a Roth IRA. The money you invest today that grows until you retire, will come back to you tax free, including the interest.
As a student, you are at the perfect age to start learning and begin investing. Waiting till your 30 or 40 will significantly affect the compounding interest effect on your money.
Start learning. Start getting Kiplingers Personal Finance Magazine – about $15.00 for a year subscription. Google ‘investing 101’ and read some articles.
For first timers, look at the ‘retirement target date funds’. They all have them, but with different words. Vanguard calls them ‘target retirement date funds’, Fidelity calls them ‘Freedom funds’. Find the one closest to your retirement date and start there. The Brokerage houses have combined some of their best funds into one fund, and they take care of it for you, shifting the funds around the closer you get to retirement. Be careful on these, they are great now – but they may shift into bond funds too early for your taste! As you continue to learn, you’ll understand this statement more!
Online brokers are happy to answer a few questions for you and will help you set up your accounts!
But, and keep this in mind, no one cares more about your money than you do!