Investing in the market

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Stock investing

Investing in individual stocks for retirement can be a way to potentially grow your savings,

but it also comes with risks.

To save for retirement, the intelligent investor will put together a portfolio of stocks and bonds. Using low fees funds and/or ETFs to put together a diverse portfolio. However, some investors may like to also purchase some individual stocks.

Pros of Including Individual Stocks:

Potential for Higher Returns: Stocks have historically provided higher returns than bonds and cash over long periods, which can help you reach your retirement goals faster.

Inflation Protection: Stock returns can help you keep pace with inflation and taxes, preserving your purchasing power in retirement.

Control & Choice: You have the freedom to choose companies you believe in and tailor your portfolio to your specific investment style.

Potential for Dividend Income: Some stocks pay dividends, which can provide a regular income stream in retirement. Also, qualified dividends from stocks that were held over a year (long term) will be taxed at a lowest rate.

Risks of Investing in Individual Stocks:

Volatility: Stock prices can fluctuate significantly, especially in the short term, which can impact your portfolio's value.

Concentration Risk: If one stock becomes a large portion of your portfolio, you're heavily reliant on that company's performance.

Emotional Decisions: It's easier to make impulsive decisions, like selling during market downturns or chasing hot stocks, which can hinder long-term growth.

Time & Research: Investing in individual stocks requires ongoing monitoring and research to understand companies and the markets.

How to purchase individual stocks

Open a Brokerage Account: Online Brokers: Most investors use online brokers for their convenience and lower costs. Examples include: Fidelity, Charles Schwab, Vanguard, Robinhood, etc.
Consider factors like fees (most offer commission-free stock trading), platform usability, research tools, and educational resources. Complete the application process, which typically requires personal information (like a social security number). Link your bank account and transfer funds to your brokerage account. Using tools that may be in your brokerage account, and other sites, research stocks that you may be interested in.
When you are ready to purchase stocks, you will need to decide on amount you want to purchase and the order type. There are several types of orders:

Market Order: Buy or sell at the next available current market price.
Limit Order: Set a specific price at which you're willing to buy or sell.
Limit Stop Order:

Buy Limit Orders

Buy Limit Order - This is where you set the maximum price you are willing to pay for a stock. The order will only execute if the stock's price drops to your limit price or lower. Buy orders will execute at or below the Limit price.

Example: Want to buy a stock XYZ currently trading at $125 but only want to pay $120 for the stock. You will need to place a buy limit order at at $120. Your order will go through only if the XYZ stock hit $120 or less

Buy Stop-Limit Order - This is where you set both the stop price to trigger the order, and a limit price for the highest price you are will to pay for a stock. When the stock hits the stop price, a limit order is activated. The order will only execute at the limit price or better.

Example: Want to buy a stock XYZ currently trading at $125 and you think that if it breaks at $135 it will go even higher. However, you want to catch the stock before it get too high. You therefore need to place a stop price order at at $135 and a limit price at $138. If the stock hits $135, your buy limit order is triggered, and you buy only if it stays at or below $138.

Trailing Stop - buy order

A Trailing Stop for a Buy order sets the stop price at a fixed amount or percentage above the current Ask price. If the Ask price falls, the stop price will fall by the corresponding decreased point/percent amount. Conversely, if the Ask price rises, the stop price will remain the same.

Sell Limit Orders

Sell Limit Order - This is where you set the minimum price you are willing to sell a stock at. The order will only execute if the stock's price rises to your limit price or higher. Therefore you make a sell only when a stock reaches a certain price. Sell orders will execute at or above the Limit price

Example: Want to sell a stock XYZ when it reaches $135 but it is currently trading at $125. So you will place a sell limit order at $135. The stock will only sell if it reaches $135 or more.

Sell Stop-Limit Order - This is where you set both the stop price to trigger the order, and a limit price for the lowest price you are willing to sell the stock. Once the stock drops to your stop price, it activates a limit order to sell at your limit price or better. This order can be used to protect against loses.

Example: The stock XYZ is currently trading at $125 and you want to sell it before it might fall too far. So you will place a stop price at $110 and a limit price of $100. The stock will only sell if it get $100 or better (but no lower). Therefore, there is the risk that if the price drops too fast and skips your limit , the order might not fill at all.

Trailing Stop - sell order

A Trailing Stop for a Sell order sets the stop price at a fixed amount or percentage below the current Bid price. If the Bid price rises, then the stop price will rise by the increased points/percent amount. Conversely, if the Bid price falls, the stop price will remain the same.

Saving for the long term (i.e. retirement)

To save for retirement, the smart investor will put together a portfolio of stocks and bonds. Using low fees funds and/or ETFs to put together a diverse portfolio. However, some investors may like to also purchase some individual stocks.

Since individual stocks may result in more volatility it is advisable when saving for retirement to put the majority of your investing in mutual funds and/or ETFs. Keep your individual stock investment to a minimum.

Investing in mutual funds and/or ETFs (Exchange-Traded Funds) instead of individual stocks has several advantages, especially for hands-on investors with a moderate risk tolerance. Here are some of the reasons:

Diversification

ETFs hold multiple assets, often hundreds of stocks or bonds, which means your investment is spread out.
This reduces the risk associated with one company's poor performance hurting your entire portfolio.

Example: Buying a tech ETF gives you exposure to Apple, Microsoft, Nvidia, Amazon, Google, etc., instead of betting on just one.

Lower Risk

Because of diversification, volatility is usually lower compared to holding individual stocks.
You avoid the risk of individual stock crashes (e.g., earnings misses, scandals, etc.).

Convenience

With one mutural fund or ETF, you can instantly gain exposure to a sector, industry, region, or even the entire market
Easier than researching and buying dozens of individual stocks.

Difference between a mutual fund and an ETF

Mutual funds and ETFs (exchange-traded funds) are both popular investment vehicles that offer diversification, but they have distinct differences in how they are structured and traded.

Trading:

Mutual Funds: Traded once a day at the end of the trading day, after the market closes, and priced at their Net Asset Value (NAV).

ETFs: Traded on stock exchanges throughout the day, just like individual stocks, with their price fluctuating based on supply and demand.

Management Style:

Mutual Funds: Some are actively managed, with a fund manager or team making decisions about which securities to buy and sell with the goal of outperforming a specific benchmark or market index. These funds often have a higher maintenance fee.

ETFs: More commonly passively managed, designed to track a specific index (e.g., the S&P 500) and hold the same securities in the same proportions.

Tax Efficiency:

Mutual Funds: Can be less tax-efficient, as the fund's trading activity may trigger capital gains distributions for investors, even if they don't sell their shares.

ETFs: Generally considered more tax-efficient, as they can leverage in-kind creation and redemption processes, minimizing capital gains distributions.

Investment Minimums & Flexibility:

Mutual Funds: May have minimum initial investment requirements and may have restrictions on short-term trading.

ETFs: Can be purchased in single share increments, providing more flexibility and potentially lower minimum investment requirements.

Expense Ratios:
Mutual Funds: Can have higher expense ratios due to management fees, marketing costs, and other operational expenses.

ETFs: Typically have lower expense ratios, especially passive index-tracking ETFs, as they require less active management and trading.

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