Think of Investing in stocks as your “second career.”  You may be employed at a company with hundreds of employees, but as an investor, you are self-employed at the same time.  

 What Are Stocks?

Many small businesses are “privately owned” by a single person, a husband-and-wife, or a small team of three or four people.  As those companies grow in size, the owners may decide to sell shares of the company to the public.  Very few large companies are owned 100% by a single person.  

Selling shares of a company – “stock” – provides a substantial amount of money to the company, which can then be used to increase its level of production, and to market nationally or internationally, versus being limited to a local market.  

People buy shares of stock in a business with the expectation that it will grow.  The price of that stock will reflect the company’s growth or decline.  

Employers 401k Plan

Most people are introduced to investing through a 401k plan offered by the company where they are employed.  Their personnel department will explain how to participate in the plan, and help make your first choices about how to invest.

Those investing choices are kept fairly basic, to make sense for employees not interested in the complexities of investing.  

401k plans are intended to help employees build up a quantity of money to be available when they retire.  The plans typically offer fairly conservative investing choices that will grow steadily if slowly over the decades.

Two employee decisions are key to the success of his 401k plan.

First, take note of the “matching contribution” offered by the employer.  Typically, an employer will contribute to each employee’s 401k plan, with a matching amount, up to 6% of the employee’s annual income.  

That matching amount may be 100% (equal to what the employee contributes), 50% (half), or 25% (one quarter).  But the key issue to understand is that that matching amount is “free money” – all you have to do is make a contribution to get it.  If you choose to contribute 6%, you will get all of the employer’s contribution.

Secondly, you can increase the growth of your 401k investments by contributing more than 6% - up to a maximum of 15%.  Working up to that 15% will very nicely increase the money you will have when you retire.

Important note:  how old do people in your family tend to live?  How old does it seem likely that you can expect to live?  People who live into their 90s need a bigger amount of money to be available after they retire.  Your 401k contribution should reflect your expectation.

A 401k is a “pretax” account.  No taxes are paid on money deposited in a 401k.  Taxes are paid on the money withdrawn from a 401k after you retire.

Trading Stock

Trading stock – buying and selling stock – is accomplished through a stock broker.  You contact that broker who holds your account and ask him to buy or sell a certain stock for you at a certain price.

A discount broker typically charges a very small fee for your stock purchases and sales.  Charles Schwab and Fidelity are examples of discount brokerages.  

A full-service broker typically charges a fee on the order of $250 per transaction.

Both will provide analytical information upon your request about stocks you are interested in.  

But a discount brokerage makes no recommendations; it assumes you have done your own analysis before deciding to buy or sell stock.  

A full-service broker, however, will review potential choices with you, and provide recommendations based on their own professional analysis teams.  

Individual Retirement Accounts

If your employer does not have a 401k program, you can open up an Individual Retirement Account (IRA) at a broker, and deposit pre-tax money into an IRA, like a 401k.  

An IRA is also a good idea if you leave a company.  Move the money out of that company’s 401k into an IRA.  Money in an IRA can be invested in more aggressive choices which, if chosen carefully, can produce greater growth for your investments.  

For those intent on making Investing their “second career”, an IRA at a discount brokerage provides the best opportunity.

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