- US stock investments can be made in three ways: individual stocks, index funds, and Robo advisors.
- Investment in bonds offers security, income, and diversification. Its drawbacks include low returns, lack of transparency, and issuer default.
- ETFs offer good returns with low investment without much risk.
Stock investment can be an excellent avenue to park money for future use while you are busy with your life. The idea is to invest money in one or more ways, with the hope that your funds will grow over time.
But to understand where and how to invest can be a challenge, although there is a lot of information available about ways to invest, which can be confusing.
Available options to invest in a stock market include shares, bonds, index funds, and ETFs.
How to invest in US stocks?
There are various ways to invest in the US stock market, such as stocks, index funds, bonds, and Robo-advisors. A detailed study of the companies, like their earnings reports and financials, can be helpful before investing in stocks.
Index funds indexes like S&P 500 and NASDAQ. They cost lower and guarantee better returns. S&P 500 has given returns of more than 10% over the years.
Also read: What are high-paying dividend stocks in US?
A Robo-advisor or a broker invests in a range of stocks or portfolios on behalf of investors based on their age, investing goals, and risk tolerance.
Investment in stocks comes with risks. Although stock market investments give returns, there is high volatility associated with it. For example, the stock market fell by 40% during the pandemic before rising to record levels. Moreover, there is no guarantee that all your bets would result in profits. Hence, it is not prudent to invest all your money in stocks alone.
Opening an account is the first step towards investing in stocks. It is an easy process. Today, many companies will help you open accounts within a few minutes, for which investors will have to pay a brokerage fee.
Account types can be standard account or individual retirement account (IRA), based on the type of investment such as stocks, bonds, ETFs, or mutual funds.
Standard account works for people who want funds for rainy days or want to invest more than their annual IRA limit. IRA works for long-term investment.
Nowadays, brokers have stopped taking trading commissions. But they offer analysis, research, educational tools that are useful for investors. Some also offer opportunities to invest in foreign stock markets.
How to invest in US bonds?
Bonds are one of the ways through which an organization or government raises funds. For instance, a government department may ask you to invest a sum in projects with a promise to give returns after a specific time.
There are two ways to earn money by investing in bonds. One option is to hold those bonds until the maturity date. Investment and interest accrued are returned on the set date. Or one may sell the bonds when their price goes up.
There are three types of bonds: corporate bonds, municipal bonds, and treasury bonds. Corporate bonds are issued by corporates and pay higher interest rates. They are riskier than government-issued bonds.
Municipal bonds are issued by the local governments, like the city or state governments. They also pay fair interest rates. Treasury bonds issued by the US government and might not offer great interest rates, but they are safe.
One should buy bonds through a broker as they are not publicly traded. However, as bonds are sold at a centralized place, like the stock market, investors struggle to obtain information about bonds, prices, etc.
Bonds offer safety, diversification, and income, but they also have drawbacks like low income, issuer default, interest rate risk, and lack of transparency.
How to invest in index funds?
An index fund is a type of investment that tracks a market index. Index funds generally invest in stocks that are on the index it follows. Three critical steps to investing in index funds are picking an index, selecting the fund, and buying.
Several indexes like S&P 500, Nasdaq Composite, and Russell 2000 and sector- specific indexes to industries exist. Once you have decided on the index, funds tracking that index is easy to find.
It is important to study index funds like whether their cost is lower. Are there restrictions to invest in it? Or does it track the index closely?
To buy stocks of a particular index fund, it's mandatory to open an account with the respective mutual fund or open a brokerage account.
The benefits of investing in index funds are low risk, reduced time spent, diverse options, less expensive, and low tax rates. Drawbacks are low returns, no loss protection, and no option to own investors' preferred stocks.
Also read: How Do I Find New IPO Stocks In The US?
How to invest in ETFs?
Exchange-traded funds (ETFs) are a simple way of investment. They generate good returns without much investment or risk. ETFs permit investors to buy many stocks or bonds at once. For example, if an investor buys an ETF of S&P 500, then his or her money will be invested in all 500 companies.
If ETFs are bought through the standard account (not IRA), income is taxable. If it is an IRA account, income is not taxable. ETFs offer exposure to stocks, bonds, and other assets at a minimum cost. They are more liquid, making it easier for investors to buy and sell. It is easy to invest in ETFs. But returns may not be at par with stocks. They are not expensive but are not free either.