Investing in Stocks

3 October 2015 – 7:02 pm

Stocks can be a valuable part of your investment portfolio and it is crucial that you are going to use it properly.

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We believe stocks can be very cost effective and investing in stocks is often much better than investing in bonds. However, stocks can be risky and we encourage investors to follow their own risk tolerance.

The below discussion may be considered a summary and is not meant to be all inclusive.

Approach to Investing in Stocks

Since you want to invest in stocks, you need to first understand what stocks are.  Stocks are a preferred form of investment because they are much safer, are easy to track, and can generate higher returns than bonds. Get to know all about them at https://www.sofi.com/invest/.

What Makes Stocks Safe?

Bonds are subject to inflation, interest rate changes, and are sometimes subject to a market crash. In contrast, stocks do not generally experience any of these risk factors.

While stocks are subject to various risks, most of the financial value of a stock comes from the price. This means if you buy a stock in today’s market, you will get back an investment that has been partially funded by the earnings of the company during the past year.

At the same time, most stocks are taxed as income, and most stocks pay dividends. Therefore, if a stock is not yet paying you a dividend, it will eventually start paying you one.

What Are the Basic Types of Stocks?

The chart below shows five basic types of stocks:

Value Stocks: Stocks with a high price to earnings ratio and a high free cash flow

. These stocks earn their owners more than they cost.

Stocks with a high price to earnings ratio and a high free cash flow. These stocks earn their owners more than they cost. Growth Stocks: Stocks with a low price to earnings ratio and a high free cash flow

. These stocks earn their owners a higher return than they cost.

Stocks with a low price to earnings ratio and a high free cash flow. These stocks earn their owners a higher return than they cost. Growth stocks. These stocks may also be called growth stocks, tech stocks, high growth stocks, or commodity stocks. Many value stocks earn high growth, while the majority of growth stocks earn high growth and low dividend yields.

Over the last five years, the value and growth stocks have generally outperformed the growth stocks. As a result, many people have increased their allocations to growth stocks.

However, growth stocks also have a tendency to lose money. When that happens, the value investors can often capture the profit with a suitable trading strategy.

Tax Considerations of Stocks

The great benefit of investing in a stock portfolio is that the Internal Revenue Service (IRS) does not tax dividends and capital gains. Instead, you can pay no taxes on the gains because they are considered to be capital gains.

However, a downside of stocks is that the capital gains tax rate is currently only 20% instead of the normal 35%. That can make it expensive to realize any gains on stocks.

The same is true with dividends and payouts from corporations. If you were to sell a stock, your dividend or payouts could be taxed as capital gains.

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