Investing FAQs

Saving and investing work hand in hand in building long-term wealth and financial security. Saving money is spending less than you earn and setting that money aside for the future—whether that's for an emergency or for a specific goal like a vacation or a new home. Most savings are held in conservative accounts that are relatively safe and easily accessible but have minimal growth potential. That's
appropriate for short-term goals, but your money is likely to lose value over time when taking inflation into account.

When you invest, on the other hand, you're using money to try and make more money. If your investments grow in value, that growth can compound. Compounding (or compound growth) is what happens when you reinvest your earnings—and keep them invested—to generate more earnings. Over time, this can lead to significant gains. Time is an essential ingredient, helping to smooth out market volatility. That's why when you have a long-term goal like a child's education or retirement, investing is especially important.

Generally, sooner is better. Many investors sit on the sidelines, waiting for the "right" time to invest. Unfortunately, timing the market is virtually impossible. Instead, consider just getting started, and remember this old investing adage: Time in the market is more important than timing the market.

It depends on how much you have, as well as your goals and timeline to achieve those goals (also called your time horizon). But a good rule of thumb is to invest the maximum you can comfortably afford, after setting aside an emergency fund, paying off high-cost debt, and funding daily living expenses. By investing on a regular basis, over time you can potentially achieve greater returns through compounding.

A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. When the value of the business rises or falls, so does the value of the stock. Returns are achieved either by selling the stock at a profit for a higher price or through receiving dividends (though neither of these outcomes are guaranteed).

Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

Investors buy and sell stocks for a number of reasons, including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Keep in mind that the price of a stock can fall as easily as it can rise.

The purchase price of stock is dependent on demand: When there are more buyers than sellers, the price of the stock rises. When there are more sellers than buyers, the price of the stock drops.

Once you've selected an asset allocation in line with your risk tolerance and invested accordingly, you can take a long-term view. That doesn't mean you can ignore your investments, however. You'll want to monitor your asset allocation and possibly rebalance annually (or more frequently) if markets are making big moves. Rebalancing is designed to keep your portfolio's target allocation across different asset classes, and intended level of risk, consistent over time.

Rebalancing means looking at the percentage of stocks, bonds, cash, and other investments in your portfolio to make sure the relative weights of each align with your target asset allocation. If any weights are meaningfully different, it may be necessary to buy or sell positions to align your portfolio with your target. By selling positions that have become overweight in relation to the rest of your portfolio and moving the proceeds to positions that have become underweight, you can bring your portfolio back to its original target allocation. Rebalancing your portfolio is an important step in controlling risk. If done within a brokerage account, rebalancing may result in taxes.

Market timing (trying to buy stocks at market peaks and sell at market lows) is nearly impossible, even for professional investors. There's a saying to keep in mind: Time in the market is more important than timing the market.

Instead of trying to time the market, focus on getting invested and staying invested. With equity compensation, you're already invested. In addition to keeping your equity invested, consider contributing additional funds—and even making it a habit via regular contributions.

There's a term for this, actually: dollar-cost averaging. Dollar-cost averaging refers to the practice of investing a set amount of money at regular intervals (biweekly, monthly, etc.), regardless of stock market performance. Dollar-cost averaging establishes good investing habits and is a prudent strategy to consider, especially for new investors.

There are fees associated with investing. Fees can include trade commissions, operating expense ratios, transaction fees, and portfolio management fees—and all these prices vary from firm to firm. You should always know what you're paying upfront. And while investing generally costs money, there are things you can do to keep costs down, like look for brokers that charge low or zero trading commissions or consider funds with low operating expenses.

Opening a brokerage account is one of the first steps to building your personal investment portfolio. A brokerage account is an investment account that allows you not only to manage your equity but also to buy and sell a variety of investments, including stocks, bonds, mutual funds, and ETFs. Any of these moves can have a tax impact. Buying or selling stock can impact your taxes. For advice on your personal situation, consult a tax advisor or a financial consultant.

When you invest in a mix of different types of investments, you are diversifying. Diversification means lowering your risk by spreading money across and within different asset classes, such as stocks, bonds, and cash. It's one of the best ways to weather market ups and downs and maintain the potential for growth.

According to the Schwab Center for Financial Research, you should be concerned if a single stock accounts for 10% to 20% or more of your total stock investments. Generally speaking, the wider the number of holdings, the greater the diversification benefits. If you only have two or three stocks in your portfolio, it won't be enough to reap the benefits of diversification.

If you're invested only in your company stock, you're not diversified and are putting funds at risk. Typically, the stock of a single company (even your employer) should account for no more than 20% of your total portfolio. Additionally, holding stock in the company you work for is uniquely risky as the stock may likely be down in price at a time when your job itself may be most at risk.

Equity compensation, in any form, is a potential way to participate in your employer's success. But like any other security, it must be carefully managed to keep with your long-term goals and financial plan.