Stocks bonds and mutual funds. I am confused about when and how to invest?

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Stocks bonds and mutual funds. I am confused about when and how to invest. I have about a 100 shares of Starbucks Coffee stock, I work for them so they do that automatically.

I want to start investing on my own but am a little confused. I want to start money in mutual funds and in other stocks, I can purchase them through fidelity (starbucks payroll deduction stock goes through them). How can I possible know which stocks to purchase.

There are thousands of them. Which mutual funds will offer the greatest return. There are so many!

I am kind of lost in how to know which ones to get and how many and when and everything! Also, when purchasing stocks through fidelity there are so many optionsOrder Type:Market OrderLimit OrderStop Loss Stop Limitetc. Time in ForceDay Fill or Kill Good 'till CancelledOn the Open on The closeetc.Conditions:All of NoneDo not reduceetc. This confuses me, I would like to understand better and start seriously investing while im still young! Any help would be great!

Thanks! Asked by miles4 32 months ago Similar questions: Stocks bonds mutual funds confused invest Business > Financial Planning.

Similar questions: Stocks bonds mutual funds confused invest.

Don't feel bad, even the brokers are confused, that is why so many people lost money in the recent down market Thinks have changed in today’s investment climate. There are two kinds of rules. The old money rules and new money rules.

Almost everyone has or is still using the old money rules. That is the main reason for the current loss of wealth. Remember Bernie Madoff and Allan Stanford were trusted advisors.

Trusted advisors don’t know anything. Old money rules included: Put the maximum in a 401K or IRA. Use investment accounts inside the IRA or 401K Use the "magic of compound interest" to work in your favor Buy term insurance and invest the difference Use historical performance for mutual funds and stocks in picking them for your investment portfolio Use dollar cost averaging when buying mutual funds Reinvest the dividends Set saving goals Variable Life insurance Buying stock on margin Using a balance sheet to define net worth Borrowing from life insurance plans Variable rate mortgages Using credit to buy everything.

Using Monte Carlo calculations to predict the probability of investing success in the future. Putting all your money in your retirement account in the stock of the company you work for. New money rules are the opposite of those listed above.

I won’t discuss each one of the above rules in this answer, only the ones that relate to your question of when and how to invest. You have asked a lot of questions so I will try and pick out the most important first and explain how a new money rule will better suit what you are trying to do. You need to remember in the old money ideas mentioned above, some are still right for some people, but not all people.

Anyone who gives you advice on what you should do regarding savings and investment is wrong if they just state what you should do. Until each of the above is examined and applied to your situation you should not take that advice. First of all, forget about all the terms and gimmicks.

Don’t worry about stop loss, or market limit order, or all the other stuff. Trying to figure it all out will just cause your brain to hurt and will eventually lead to analysis paralysis. Just stay away from stocks in the beginning.To invest with the proper portfolio diversification in stocks you need to have about 20 positions with about $5,000 in each one.

Remember money is not math and math is not money. Money is a commodity. If you try to just use deductive reasoning (math only) as most advisors do today, your plan has a 100% chance of failing.

In deductive reasoning an advisor will ask you: What age do you want to retire? (How are you supposed to know that today) How much money to you want at retirement?(How do you know today how much you need in 40 years.) How long do you think you will need that income? (How long are you going to live?

) If you don’t answer the above questions, the advisor can’t formulate a plan for you. He needs those answers in order to "do the math". So how does this apply to you?

You also have to use inductive reasoning to have a successful plan. There is no way to pick which mutual funds will offer the greatest returns. If we were able to figure this out, no one’s 401K would have become a 101K.

Most advisors will show you historical (past performance) returns (#5 above) in order to guide you into picking funds. Storical performance is worthless. It tells you nothing about the future.

The will also show you graphs, (mountain charts) that show this historical performance. Unfortunately, the charts ignore loads, taxes, inflation, estate taxes, liability suits, disability or death. They will tell you about the tax and loads on the bottom in fine print, but the print is so small, most people miss this.

Mountain charts are worthless. Mutual funds and stocks are not the same thing, although they are both equities. A share of stock is an investment in one company.

For example, one share of Nike. A mutual fund is made up of many companies grouped together based on the objective of the fund. Examples, are growth funds, Municipal bond funds, index funds, small cap and large cap funds, money market funds, etc. With a mutual fund you can invest in a large number of companies inside the fund, not just one.

But mutual funds have load charges and other fees. So when you invest in a mutual fund you have to determine what these fees are to see how much of return you need to offset the fees. For example, if you have a fund averaging 5% and the fees are 1.5% a year, you are really only earning 3.5%.

Fees are often expressed as basis points. For example 1.5% = 150 basis points. Then you need to calculate what your tax exposure is to determine the true rate of return.

Dollar cost averaging (#6 above) is the worse way to invest in a mutual fund over the long term. In the beginning it helps the new investor who does not have much money available. This way you can buy fund shares at $100 or $200 a month.

DCA also helps to reduce fund risk, but over the long term it will produce only average investment returns. That is why the word average is in the name. Dividend reinvesting (#7 above).

Do you know why people do this? Or do they just do this because it sounds good to have the dividends reinvested. Or was it the advice of an advisor or friend.In most cases this may not be the best choice for these dollars.

When dividends and capital gains are reinvested, there is tax owed on the distributions even if they have been reinvested. This tax is called a lost opportunity cost.It is called this, because once you pay the tax to the government, you have lost the opportunity to do something else with it. The real value of the fund is the difference between the cost to acquire the fund and the value of the money when you go to spend it.

In most cases it might have been better to take the dividends and capital gains as cash, pay the tax once and then put them in some kind of tax free account.(Roth IRA for example). This way they will continue to grow, but you won’t have to pay tax on them each year.(You pay tax each year on the dividend generated by the fund. The more you invest, added to the reinvested dividends, usually creates a larger dividend the next year.

Then you pay the tax again. The "magic of compound interest" (#3 above) over the long run is a costly way to save large sums of money for people in high tax brackets or who are accumulating a lot of wealth. This also applies to mutual funds because allowing dividends to reinvest is compounding money.

Here is an example. Let’s say you are able to save $20,000 a year in a fund earning an average of 5%. In 26 years the account will have over a million dollars in it.

In the 26th year it will earn $51,113 of interest that you have to report on your taxes as income. That means you have to add $51,113 of income to your other income, Social Security, dividends, capital gains, other earnings. The tax on that money is $15,334 in a 30% bracket.

Where are you going to get the money to pay the tax.It can come from one of three places. The mutual fund account itself.(you have to sell shares to pay the tax which create more tax. ) From your income, or from another savings account.

Plus, because you will owe an additional $15,334 in taxes, you will have probably had to pay estimated taxes each quarter to make sure you were not under withholding and be subject to additional interest and penalties from the IRS. Taking money from the account is called netting the account. If you need to do this, you stop the ability to grow wealth in that account.

Using investment accounts inside an IRA or 401k.(#2 above). Everyone does this because the philosophy is in order to grow the account, you need to have it invested in equities because this is where the greatest return is. This is also where the greatest risk is.

This also exposes your investment dollar to higher taxes. Outside an IRA or 401k equity dollars are taxed at a capital gain rate of 10 to 15%, (held over 12 months). Inside the IRA or 401k, equity shares are taxed at ordinary income tax rates which can be as high as 35% currently.So you are exposing your invested dollar to as much as 25% more on each dollar.

You can not write off an investment loss inside a qualified plan. Outside the plan you can. You have more investment choices outside the plan.

You run the risk of being taxed at a higher rate on withdrawal, than what you got credit for. Supposed you are in the 20% tax bracket now. This means you received a .20 cent credit on every dollar you put in the plan.

But, what if you are in the 35% bracket when you take it out. This means you will be paying the government 35 cents on every dollar you originally received a 20 cent credit. Putting the maximum in an IRA or 401K.(#1 above).

This is financial suicide. I recommend to my clients to try and save 15% of income each year, (or as much as possible and work up to the 15%.) until you have accumulated 50% of one years income in safe savings vehicles. Then start the 401K, but only contribute up to the company match not to exceed 7% of income.

If you start trying to put in the maximum and run into a financial emergency (market drops 50% in value, you get laid off and need to make mortgage payments) it is very difficult to get money out of the 401K. And since this account is for retirement, not a savings account, you are defeating the whole purpose of a 401K. You keep putting the 15% away each year and once you have the 50% of one years income, you then start to move money into mutual funds, bonds, and eventually stocks.

Buying stock on margin.(#10 above). This means you borrow money from the brokerage company to buy stocks. The guy who thought this up should be run out of town.

People who have no money could borrow money to invest. Tell me what is wrong with this picture. It was a way for the brokerage company to make money from people who did not have larger amounts to invest.

You want to stay as far away as you can from buying stocks on margin. Setting savings goals. (#8 above).

Every advisor and every investment company uses this term. Set you savings goals for the future. It is impossible to do this.

You don’t know what interest rates, tax brackets, stock market performance and inflation will be in the future. You don’t know what new technology will be available to use. In 1960 could you have predicted, cell phones, internet, laptop computers, etc. , and the added expense that comes from owning one.

How can you set a goal? The advisor says "How much money do you want or need 25 years from now? " You say $1,000,000.

The advisor says, "what do you feel is a fair average rate of return over 25 years? " You say 5%. He says you have to save $19,953 a year.

You say, "I can’t do that. " He says, "lower your goal or give me another interest rate average you think is fair. You say, "How about 8%.

He says you need to save $12,666. You say, "that's better. I think I can to that."

You see what has happened here. You have used deductive reasoning, (math) to set a goal, that you changed quickly when you thought it would be impossible to save over $19,000 a year. Now what happens when the average of 8% goes down, or you have an emergency and can’t save $12,666 for a year or two.

You can’t set a financial goal that way. What you should have said when he asked you how money you wanted 25 years from now, you should have answered, "as much as possible. " This way you can start a savings plan that fits your lifestyle, insight, logic, and common sense.(inductive reasoning).

Using both deductive and inductive reasoning will establish a better savings program. So what I am say in the answer above is, it is not where you save your money, it is how your save your money. Your plan needs to have structure.

You need to have your money spread among many different types of savings and investment vehicles so if one goes south on you, you have the others to make yourself whole again. People who have lost money, lost it because the used one type of savings vehicle, (example, maximum amount in a 401k in equities. ) They had no other fallback position.No safe money.

So when the market went down they lost. And now they are crying they have lost 50% of their 401k. Why are they upset?

They should have filled out a risk tolerance form that showed that they were willing to take that risk. They knew the risk. That is why they put their money where they did.

There is a securities arbitration attorney named Daniel Solin, http://smartestinvestmentbook.com/about.php who once said. "There is no shortage of information about the subject of personal finance. I know of no subject where there is more information and less comprehension.

What accounts for this anomaly? It is not the lack of motivation, spending, or timely information. How, then, is it possible that the vast majority of Americans are in such financial disarray, despite their hard work and their well-intentioned efforts to avoid this predicament?

Clearly, whatever financial advice we are listening to is not working. It appears that traditional financial advise isn't working (old money rules) and a new Paradigm is needed." Take your time learning about investing.

Look and listen to the advice you are getting. Then ask yourself, does this advice work.Is it the same old advice being said a different way. Make sure the advice you take is from someone who has sat down with you and looked at your specific situation, not someone on TV or radio who says this is what you should do.

Make them verify what they are telling you is in your best interest..

The simpler, the better... The learning curve on the kind of stuff you’re talking about is quite steep and can prove to be very expensive. If you try to learn all of that while you are investing at the same time, there is too high of a chance that you’ll lose significant amounts of money along the way. Statistically, wealthy people keep their investing very simple.

The exotic, complicated investing you see on TV and in the movies is not generally the kind of investing that wealthy people actually do. I understand, and have used, all of the things you are talking about over a couple of decades’ worth of time, and have come to the conclusion that it’s better to invest the way the rich do--that’s what I’m doing now, I don’t even bother with all of that complicated stuff anymore. Statistically, the way I invest now is much safer, and works much more consistently over the long-term.It’s fun to learn about the investing methods you mentioned, but they are for speculating with money you can afford to lose.

For serious, long-term, get-wealthy kind of investing, I recommend doing it the way the rich do. I am a financial counselor involved in a free ministry that teaches people how to handle their money and how to invest. You can find my free website at eclecticsite.com/financial.html Before making any decisions, PLEASE read the articles "Getting Started In Investing" eclecticsite.com/investing.html and "Investing In The Stock Market" eclecticsite.com/StockMarket.html Come to think of it, since you’re asking for advice from others, you might also want to read "To Whom You Should Listen" eclecticsite.com/whomyoushouldlistento.html Sources: http://eclecticsite.com/financial.html .

Then start putting your money into Index Funds. These are funds that buy only stocks that are listed in one of the stock indexes, like the Dow, S&P, Nasdaq etc.The advantage to these funds is that when the stock market rises, it is because of these stocks gaining in value. And it will rise again.

But probably not soon enough for me to make any money off of it, but if I were young I would consider this a great opportunity. Consult with someone who knows something before leaping in. I'm just going on what I read and hear.

Speaking of which, I just recently got this from an email, therefore, you may have seen it 15 times already, but the old ones are the best ones:If you had purchased $1000 of shares in Delta Airlines one year ago, you would have $49.00 today. If you had purchased $1000 of shares in AIG one year ago, you would have $33.00 today. If you had purchased $1000 of shares in Lehman Brothers one year ago, you would have $0.00 today.

But---- if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling refund, you would have received $214..00. Based on the above, the best current investment plan is to drink heavily & recycle. It's called the 401-Keg.

2 You might consider that you have asked a lot of questions in one question...Back in the day when I used to "Answer" questions my response would go on and on for quite some time trying to cover each and every point. Fact is this 'discussion' will go on for a bit, too, but not nearly as long, so Point #1 is to tell you that you are trying to eat the apple in one bite, and that can't be done...Hermes has offered some excellent advice, and has also provided some very depressing examples regarding the Risk and Reward aspect of "Investing". I am here to say I agree with much of what he has said, but have my own way of saying it:First of all, make a differentiation in your mind between "Saving Up For Something" and "Investing" which is done to try to ensure you have an enjoyable retirement."Investing" is obviously a "Long-term" thing...Do both.

"Save" in a bank (credit union, whatever) - find a good bank that offers decent rates and "Save" with them for a car, vacation, new TV, whatever..."Invest" in employment provided "401-K's", and Government permitted "I.R.A. 's" and "Roth I.R.A.'s"...You may also "Invest" in a "Taxable Account"...(The fact that you don't know much or anything about these accounts only means that this is where you begin - find out what each one is - write it down, memorize it - it ain't that difficult - I did it, and I'm dumb as a box of rocks, so I know you can do it...)The advantage of the 'other' accounts (401K, I.R.A. 's, etc) is that you don't pay any taxes on the gains in these accounts until you start to withdraw money from them ('withdraw' is usually called "take a distribution from") Keep a notebook on all these definitions...The disadvantage of the "Taxable Account" is twofold, actually: 1) you need to ensure you are keeping good records (save everything about your purchases of stock, mutual funds, etc, and then of their sales, as well), and 2) you need those records to pay the necessary taxes each year, if there are any. (Keep in mind that if you are paying taxes it means you are making money, so think positive about taxes - there's nothing you can do about them anyway, might as well find their 'rosy' side - lol...)Now, what to invest in? Remember the KISS system for everything?

K.I.S.S. Stands for, "Keep It Simple Stupid", and usually refers to my golf game...With respect to investing it means that until you have acquired the necessary education to invest in 'pork bellies' and 'oil futures', for example, keep it simple by staying with Very Good Stocks (Not as easy to define as it looks, I agree, and as aptly put by Hermes in his dissertation above, but still eminently possible to accomplish), and of course, with Very Good Mutual Funds. Going to limit the lesson on Very Good Stocks here because I gotta get to the gym, but feel free to pm me for more info (I'm very good at this 'investing' business although I am decidedly NOT in the business)...I won't steer you wrong...First, STOP buying stock in the company you work for... Nothing against Starbucks, although their better days are behind them, this advice holds for virtually everyone... Virtually, not all, there are exceptions I readily admit... Long story on the "WHY?", don't have time...Second, if you have a 401K with your employer you should ensure that you contribute enough to cover the amount necessary to get the full benefit of whatever amount it is that they 'match'...Put your money in the "Safest" investment vehicle available until you know what you are doing...Third, if you have 'investment money' left over, open a ROTH I.R.A. Account with an "Online Brokerage" such as E-Trade, Schwab, Ameritrade, whatever, and start making regular deposits into that account up to the limit allowed by law for a given year...Need to insert "Bud's Rule Number One for Investing" which is "Investment Money is Retirement Money - Never Mess With Your Retirement Money - Ever"... That means what it says - you don't use your investment money to buy a new Play Station 4, an engagement ring, a new house, a new car, nothing...If you abide by rule number one you will have a very nice retirement, I do...The corrollary to rule number one is that "When you reach a point in your life where you can no longer earn an income, you must then live on whatever it is that you have accumulated, and if that is not as much as it ought to be that is ENTIRELY YOUR FAULT. " 4) Keep your savings separate, AND in a separate institution...Now, what to "Invest" in?... This is applicable to stocks as well as mutual funds... 5) Do your own research on the 'good companies' that you patronize... To name a few: Coke, Pepsi, McDonald's, Burger King, IBM, Walmart, Your Water Company, Your Electric Company, Wherever you buy your gasoline...6) Stay away from certain industries until you know what you are doing: The Airlines, Retail, Cars, whatever else scares you...7) Try to buy stocks that have a good 'growth record', and that pay a dividend...8) Reinvest the dividends by signing up for their DRIP (with your broker)...This buys you more shares of that stock...D.R.I.P. = Dividend Reinvestment Plan9) "Diversify"... When you buy your first stock (other than your employer) make sure it's in an industry different from your employer... Each time you buy a stock try to have it be in a different industry from the others you own...10) Mutual Funds are much more complicated, but just as necessary... Learn something about stocks first, then take on the funds... Feel free to check back with me on that...Right now I really gotta get to the gym,Best of Luck...ps - We didn't even really scratch the surface...

You might consider that you have asked a lot of questions in one question...Back in the day when I used to "Answer" questions my response would go on and on for quite some time trying to cover each and every point. Fact is this 'discussion' will go on for a bit, too, but not nearly as long, so Point #1 is to tell you that you are trying to eat the apple in one bite, and that can't be done...Hermes has offered some excellent advice, and has also provided some very depressing examples regarding the Risk and Reward aspect of "Investing". I am here to say I agree with much of what he has said, but have my own way of saying it:First of all, make a differentiation in your mind between "Saving Up For Something" and "Investing" which is done to try to ensure you have an enjoyable retirement."Investing" is obviously a "Long-term" thing...Do both.

"Save" in a bank (credit union, whatever) - find a good bank that offers decent rates and "Save" with them for a car, vacation, new TV, whatever..."Invest" in employment provided "401-K's", and Government permitted "I.R.A. 's" and "Roth I.R.A.'s"...You may also "Invest" in a "Taxable Account"...(The fact that you don't know much or anything about these accounts only means that this is where you begin - find out what each one is - write it down, memorize it - it ain't that difficult - I did it, and I'm dumb as a box of rocks, so I know you can do it...)The advantage of the 'other' accounts (401K, I.R.A. 's, etc) is that you don't pay any taxes on the gains in these accounts until you start to withdraw money from them ('withdraw' is usually called "take a distribution from") Keep a notebook on all these definitions...The disadvantage of the "Taxable Account" is twofold, actually: 1) you need to ensure you are keeping good records (save everything about your purchases of stock, mutual funds, etc, and then of their sales, as well), and 2) you need those records to pay the necessary taxes each year, if there are any. (Keep in mind that if you are paying taxes it means you are making money, so think positive about taxes - there's nothing you can do about them anyway, might as well find their 'rosy' side - lol...)Now, what to invest in? Remember the KISS system for everything?

K.I.S.S. Stands for, "Keep It Simple Stupid", and usually refers to my golf game...With respect to investing it means that until you have acquired the necessary education to invest in 'pork bellies' and 'oil futures', for example, keep it simple by staying with Very Good Stocks (Not as easy to define as it looks, I agree, and as aptly put by Hermes in his dissertation above, but still eminently possible to accomplish), and of course, with Very Good Mutual Funds. Going to limit the lesson on Very Good Stocks here because I gotta get to the gym, but feel free to pm me for more info (I'm very good at this 'investing' business although I am decidedly NOT in the business)...I won't steer you wrong...First, STOP buying stock in the company you work for... Nothing against Starbucks, although their better days are behind them, this advice holds for virtually everyone... Virtually, not all, there are exceptions I readily admit... Long story on the "WHY?", don't have time...Second, if you have a 401K with your employer you should ensure that you contribute enough to cover the amount necessary to get the full benefit of whatever amount it is that they 'match'...Put your money in the "Safest" investment vehicle available until you know what you are doing...Third, if you have 'investment money' left over, open a ROTH I.R.A. Account with an "Online Brokerage" such as E-Trade, Schwab, Ameritrade, whatever, and start making regular deposits into that account up to the limit allowed by law for a given year...Need to insert "Bud's Rule Number One for Investing" which is "Investment Money is Retirement Money - Never Mess With Your Retirement Money - Ever"... That means what it says - you don't use your investment money to buy a new Play Station 4, an engagement ring, a new house, a new car, nothing...If you abide by rule number one you will have a very nice retirement, I do...The corrollary to rule number one is that "When you reach a point in your life where you can no longer earn an income, you must then live on whatever it is that you have accumulated, and if that is not as much as it ought to be that is ENTIRELY YOUR FAULT. " 4) Keep your savings separate, AND in a separate institution...Now, what to "Invest" in?... This is applicable to stocks as well as mutual funds... 5) Do your own research on the 'good companies' that you patronize... To name a few: Coke, Pepsi, McDonald's, Burger King, IBM, Walmart, Your Water Company, Your Electric Company, Wherever you buy your gasoline...6) Stay away from certain industries until you know what you are doing: The Airlines, Retail, Cars, whatever else scares you...7) Try to buy stocks that have a good 'growth record', and that pay a dividend...8) Reinvest the dividends by signing up for their DRIP (with your broker)...This buys you more shares of that stock...D.R.I.P. = Dividend Reinvestment Plan9) "Diversify"... When you buy your first stock (other than your employer) make sure it's in an industry different from your employer... Each time you buy a stock try to have it be in a different industry from the others you own...10) Mutual Funds are much more complicated, but just as necessary... Learn something about stocks first, then take on the funds... Feel free to check back with me on that...Right now I really gotta get to the gym,Best of Luck...ps - We didn't even really scratch the surface...

3 You've gotten some very good advice so far. Don't buy individual stocks at your age, not until you've gotten a basic diversified portfolio, best done with an index fund. Those options are for micromanaging stock sales.

They matter primarily when you're placing enormous orders (which you're not) or when you're day trading (trying to take advantage of tiny jitters in the market by buying when it dips a fraction of a point and selling a few hours or even minutes later when it goes up a fraction of a point). I strongly recommend against day-trading. If you're not doing that, you'll just place your "market order": you buy or sell the stock at whatever is the going rate.

Plan to hold the stock for at least a year, since otherwise you'll end up paying more taxes on it. The others are various kinds of automatic trading. A "limit" is an order to buy or sell at a specific price: when they find somebody willing to take it, the order happens.

A "stop" is looser: when the price hits some point, sell it (or buy it) at whatever the market is trading at. That way, if the price falls a lot when you're not looking, they have orders to sell no matter what, so you won't get caught holding a stock that's dropping. I never use them.

A "stop limit" is a stop order that becomes a limit order rather than a market order, which is trying to combine the best of both worlds but risks having you not sell the stock in a drop. Again, I never use it. All of these can be combined with a term.

I always use the option "good til canceled". The others are for when you want to pay day-to-day attention to your portfolio, and trust me, it's just not worth the effort. Buy a good stock, and hold it for a long time.

How do you find a good stock? Well, if you don't know, don't buy. Buy an index fund or mutual fund instead, which is basically letting those people who are experts shop for you (for a fee).

You invest in a particular stock when you've looked at its business and you think it's going to pay well. Here's the problem: everybody else is also looking at the same stocks. If a stock is obviously going up, everybody buys it, and so the price goes up, so it's no longer a good value.

The only way you can beat them is to know more about the stock than everybody else does. Say, you think that they make really good products, and that they're going to continue to do so. It takes a lot of research to make that judgment, so I suggest you instead look only at mutual funds and index funds.

You've gotten some very good advice so far. Don't buy individual stocks at your age, not until you've gotten a basic diversified portfolio, best done with an index fund. Those options are for micromanaging stock sales.