The word “stocks” conjures images of panicking corporations, negative red numbers being flashed at the final bell, and maybe even soup kitchens for some people.
Whatever preconceived notion you have about stocks being a curse needs to be eradicated. Stocks have been the sole reason for many people’s financial success. Especially for those of us who are planning our retirements, stocks can be extremely beneficial because they can help investors reach their long-term goals.
You do not have to be an expert to invest in stocks or to manage your own finances. You just have to know which stocks make for sound investments. There are some things you should take into consideration before you invest, however, and it can’t hurt to discuss matters with a financial advisor before you make your decision.
Let’s start by establishing a proper image of what stocks are. By definition, stocks represent partial ownership of a corporation. When you purchase stock, you purchase a small portion of a company. Shareholders of stock can benefit in two ways:
1. Income—the companies whose stocks bring in really good returns usually offer their shareholders dividends (quarterly distributions of cash).
2. Capital Gains—when an investor is able to sell a piece of stock for more than he or she bought it for, they have achieved capital gains.
Retirees nowadays are living longer than their parents. It goes without saying that longevity is a good thing, but with that increase in retirement years comes a need for even more planning. Investing in stocks allows your retirement fund to continue to grow even while you are using it. You can invest in stocks either directly or indirectly.
If you choose to purchase stocks directly, you will need a brokerage account. For every piece of stock that you buy, you will pay a commission to your brokerage firm for completing the transaction. If you choose to invest directly, you will want to make certain that you do not put all of your eggs in one basket; invest in a variety of different industries, and avoid putting more than 10 percent of your portfolio into any one stock.
You may also invest indirectly by investing in a mutual fund. With mutual funds, financial professionals decide which stocks to invest your money in and when is the best time to sell them. Unlike purchasing stocks directly, a mutual fund immediately diversifies your portfolio because it buys a share of another portfolio that includes more than one security.
Always start by investing a small portion of your finances. That way, if you find that you are happy with the way a piece of stock performs, you can invest more in it instead of having risked too much and losing it. It is also of great importance that you make certain that you are comfortable with the level of risk that you will be taking prior to making any investment. You certainly do not want to compromise your peace of mind for the sake of trying to multiply your wealth. However, after weighing the many benefits that retirees can enjoy from investing in stocks, the risks will seem minor by comparison.