Throughout the week, I receive several, great questions from readers. These questions have either been emailed directly to me or left in comments. Most are answered immediately, but if I feel that others can benefit from the answers, I will share them on Friday.
If you’re reading this and thinking to yourself, “I have several, financial questions that I’ve wanted to ask somebody”, please contact me and ask away. I love educating readers and contributing to financial literacy.
Question: What’s an IRA
The one thing that sounded appealing to me was the IRA account…. Would someone mind explaining what exactly this is, please? =) Thanks
IRA stands for individual retirement account. There are several types, but the most common are the Traditional and Roth IRA. Both are instruments that help you save for your future retirement.
Basically, you can contribute to the Traditional with tax-free dollars but you must pay taxes when you take the money out. The Roth works the opposite way – you contribute with after tax dollars but you pay no tax when you take money out. Once you turn 59.5, you are eligible to start taking the money out without being penalized. At age 70.5, you must start taking a required minimum distribution out of the Traditional IRA, but you are not required to withdraw a minimum amount from the Roth.
There are less common types of IRAs such as simple, SEP, spousal, custodial, inherited, etc. They each apply to specific situations. In a future post, I will explain them all in more detail.
Question: Invest in a company
Would it be the best decision to invest in a non-profit organization?
It all depends on the organization. Although, you will not find a non-profit organization publicly traded. Shares of stock trade at multiples of future earnings and if a company is not earning anything and is not structured to do so, it will not be traded publicly. That being said, you can donate to a non-profit and “invest” your time and money, but it would be a different kind of investment.
Question: Trailing stop order
I normally place a 20-30% trailing stop. If I had bought the Call on Monday (I think this string between you and I began Tues or Wed), it increased and decreased significantly on Tuesday. In all likelihood the it would have automatically sold by the criteria I’d set. What would you have done in this instance? Hold onto it without the trailing stops?
Trailing stop orders are great for stocks, but I would not recommend them for options. In fact, many brokers will not allow trailing stop orders on options. This is because the order is converted into a market order when the price is reached. A few years ago, volatility was at an extremely high level and market orders on options were disabled to protect investors from invalid executions.
Volatility has since declined, but you’ll find that most firms still prohibit market orders on options during the first 15 minutes of trading (9:30 – 9:45).
Question: Age to open a brokerage account
I’m currently 16 and I believe one must be 18 to officially invest in the stock market. If I wanted to invest some money in the stock market how would I go about doing it? Would I have to go to a bank? Theoretically would I be able to make a certain amount of bank accounts for different purposes? For example have 1 bank account for monthly expenses, another for savings, and one for investing on stock?
You can open an account if you’re under 18, but you must have a custodian listed with you. The account is 100% yours and once you turn 18, the custodian can be removed.
To purchase stock, mutual funds, ETFs, bonds, etc., you must open a brokerage account. A lot banks offer brokerage accounts, but I wouldn’t use them for two reasons: the cost is much higher and the tools are not as good.
I would recommend opening a brokerage account with a discount broker. Many of them offer online and in-person training to help out new investors.
Thank you all for your wonderful questions! I look forward to all of the inquiries next week.