This time has taught us that it’s important to diversify your income so if one revenue stream gets cut off, say by layoffs or a downturn in revenue, then you have other avenues. Many people have been asking me about getting into the stock market. While this isn’t my favorite area to invest in, real estate and business are best, I am still active in the market.
There is something innately scary about the stock market. The options can seem infinite, and the risk appears steep. The terminology alone takes a while to learn. So how do we boil the stock market down?
Breaking Down the Terminology of the Stock Market
Stocks and Bonds
These are what are actually traded in the stock market. Stocks are an equity security that represents ownership in a corporation and a claim on part of the corporation’s assets and earnings. Bonds are a debt security in which an investor loans money to an entity for a defined period of time at a variable or fixed interest rate. Cash equivalents are also a part of the stock market, but they are beyond what I would like to address in this blog. Cash equivalents are generally more important for corporations trying to hold short term money than they are for individual investors.
Traditional IRA VS. Roth IRA
The majority of people do not fully know how to invest when it comes to the stock market or preparing for retirement. There are several tax-favored vehicles in the U.S. that the government has set up for us to be able to participate in the stock market.
The first one is a traditional IRA. A traditional IRA is an Individual Retirement Account to which you contribute pre-tax or after-tax dollars. It allows your money to grow tax deferred. For every dollar you contribute within the maximum limit for your age bracket, it can be directly deducted from your income for that tax year. When you make withdrawals after age 59, they’re treated as current income or as earned income. The money you deposit in your IRA isn’t taxed. I don’t like traditional IRA’s for an important reason: When you pull the money out at age 70, which is where the mandatory withdrawals begin, you have to pay at an earned income tax rate, which for most people is in that 25-35 percent bracket. You get hit pretty hard. You can start withdrawing at 59, but most people wait until it’s mandatory at 70.
In a Roth IRA, you pull the money out at retirement age with no taxes. A Roth IRA is an individual retirement account that offers a valuable future tax break: tax-free income in retirement. Like beauty, the benefit of the Roth IRA is in the eye of the beholder. It depends on the beholder’s tax bracket, both now and when he or she retires. So there is no upfront tax deduction for a Roth IRA. When you put money in a Roth IRA, you don’t get to write it off your taxes for that year. But it does mean that the money and all of the earnings grow tax-free.
Brokerage Account
A brokerage account is simply a bank account. There is nothing fancy about it. It is a bank account that allows you to buy, sell, and trade individual stocks and bonds, mutual funds, and exchange-traded funds. A brokerage account is an arrangement between an investor and a licensed brokerage firm. It allows the investor to deposit funds with the firm and place investment orders through their brokerage. The brokerage then carries out the transaction on the investor’s behalf. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he or she incurs from the account.
With brokerage accounts,you can sometimes open an account for as low as $25. But in most cases, they have a restriction where you can’t buy until you’ve saved up to $500-$1,000.
I hope this post has helped clear up some mystery surrounding the stock market. There is so much I could go deeper into, but I wanted to start with this. On tonight’s free live stream, our investment expert, Chad Frantzen, will be giving an update on the market. Registered here!
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