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Stocks vs. Options: Discover Which May Work Best For You

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Most investors are familiar with stocks and the stock market. Popular stock benchmarks like the Dow Jones Industrial Average and S&P 500 are widely quoted in the news. The health of the stock market is often equated with the health of the economy.

Stock options are another way to participate in the movement of stocks, and they can offer investors an alternative to direct ownership of stocks. We will look at both stocks and options and discuss how investors might use these tools.

Stocks explained

We hear the term “stock market” on a regular basis. But what does owning shares of a company’s stock actually entail?

Owning shares of stock in a company actually makes the shareholder an owner. This doesn’t mean you can walk into to the company’s headquarters and take over, but it signifies that you have a claim on the company’s earnings.

There are two classes of stock: common and preferred. Not all companies issue preferred shares. Common shares are the shares whose prices generally are quoted in reference to the stock of companies like Apple, Exxon Mobil and others.

Common shareholders have the right to vote at the company’s annual meeting (either by mail, online or in person in some cases) and to receive any dividends paid by the company to common shareholders.

With preferred stock, shareholders have a preference on any dividends declared by the company — meaning these shareholders would receive their payments before common shareholders in the event there would be a problem making dividend payments. Preferred stock does not carry voting rights, however.

How stocks are traded

Stocks are traded during the period when the stock markets are open — for example, from 9:30 a.m. to 4 p.m ET at the New York Stock Exchange. Shares can be bought or sold online using a brokerage account. For those working with a broker, orders can be placed with the broker, whose firm will execute the trade on your behalf.

When trading stock, you generally will incur a transaction cost of some sort. Full-service brokerage commissions generally are among the highest. Examples of full-service brokers include Merrill Lynch and Morgan Stanley. Online transaction costs generally are cheaper, with some firms offering a number of commission-free trades to induce new clients to move their business to the firm.

You will need to have an account with a custodian in order to trade stocks. There are many options available to you, ranging from traditional full-service brokerage firms to discount brokers like Charles Schwab, Fidelity and TD Ameritrade.

Pros and cons of stock investing

Some pros of stock investing include the following:

  • Investing in stocks can be a means of accumulating wealth. As the underlying company grows over time, the price of its stock has the potential grow along with its business.
  • Stocks can serve as a hedge against inflation.
  • Shareholders can benefit from preferential tax rates on long-term capital gains if they hold their shares for at least a year.
  • Stocks are traded throughout the day, and transactions generally are implemented almost instantaneously, especially on shares of widely traded stocks.
  • There are a variety of order types that can be used to set limits on the downward movement of your shares or to buy when a price trigger is met.

Here are some cons of stock investing:

  • Investing in stocks takes a level of research and knowledge that entails understanding the company’s underlying business and the factors that might influence the stock’s performance. This can take time and effort. Whether you are buying the shares to hold for a period of time or you plan to day trade, it’s important that you understand what you are doing.
  • Owning individual stocks can make it difficult to diversify your investment portfolio, especially for small investors. This might entail holding a concentrated position in just a few shares; if one or more of the stocks hits a rough patch, it can have an outsize impact on your wealth.

Options explained

Stock options offer the option holder the right to buy or sell shares of the underlying stock at a set price within a certain time frame. Beyond options that are traded on exchanges, employee stock options are issued by some companies as a form of compensation to their employees (or vendors and contractors in some cases).

Options can become quite valuable depending on whether the underlying stock moves in the direction the investor expects — up or down — as long as the move happens before the option expires.

Key option terms

A call option allows the option holder to purchase the stock at a set price within a set time.

A put option allows the buyer to sell shares of the stock at a set price within a set period of time.

The strike price is the price at which the option can be exercised.

The premium is the amount the buyer of the option pays for the option, and it represents the maximum profit the seller of the option can realize.

The option seller will be obligated to sell shares to the option holder if the call option is exercised or buy them in the case of the exercise of a put option. They can face a significant risk of loss.

For example, if a call option for 100 shares of a stock is exercised at the strike price of $10 per share, the option seller needs to furnish those 100 shares to the option holder. If they own the shares (a covered call), they would transfer the shares to the option buyer. If they don’t own the shares, they will need to go into the market, buy the 100 shares at the market price and furnish them to the option holder.

How options are traded

Options are traded on exchanges like the Chicago Board Options Exchange (CBOE). Options trade as contracts, with one contract covering 100 shares of the underlying stock or other security (exchange-traded funds, etc.).

The price you would pay for an option (or would receive if selling one) — the premium — has two components. The intrinsic value is the difference between the strike price and the market value of the underlying stock. The time component has to do with other factors, including the time until the option expires and the volatility of the stock. The price of the option contract will fluctuate based on these factors.

Three common options trading strategies

The long call is an options strategy in which the investor buys a call option with a strike price below their expectations for the stock’s price. They then can exercise the option and buy the stock at a below-market price if they are correct (and the option hasn’t expired).

In a covered call, the investor sells a call option at a strike price above the current price of the stock they own. If the stock remains below the strike price, they keep both their shares and the premium they earned when selling the option. If the stock surpasses the strike price, the investor will lose their shares but keep the option premium.

The long put is a bet on the decline of the price of the stock. The investor buys a put option. If the stock price falls to a level below the strike price, the investor may sell shares at the strike price. For example, if the strike price is $50 per share and the stock falls to $30 per share, the investor makes $20 per share, less the cost of the option. If the stock price is above the strike price, then the option will expire worthless and the investor is out the cost of the options.

Pros and cons of options trading

Here are some pros of options trading:

  • Options trading generally requires less of an investment than buying the shares of the underlying stock outright.
  • For option buyers, the maximum downside risk is the amount paid for the option. If it expires worthless, that is the extent of your loss.
  • Buying and selling options can provide relatively large gains for a relatively small investment.

Some cons of options trading include the following:

  • Like any other trading endeavor, successful option traders take the time to master what they are doing. That means it might not be the right path for “dabblers.”
  • Option sellers can lose a great deal of money if the stock moves drastically away from the strike price. You have virtually unlimited liability to provide shares for a call option buyer or to buy shares from a put option buyer.
  • Options come with a time limit. If the stock doesn’t move in a direction that benefits the option trader, the option can expire worthless.

How stocks and options are similar (and different)

Trading options has some similarities to trading stocks, including:

  • Success in both endeavors will be related to accurately picking the right stocks to focus on and the direction the stocks will move.
  • Choosing the right stocks and their underlying options to trade takes research and an understanding of the markets.

There are differences to be aware of, however:

  • Investing in stocks can be a long- or short-term endeavor. Options, by their nature, have a short-term focus.
  • Options are a “bet” on the movement of a stock and are short-term by nature.

While there are no hard-and-fast profiles of a typical stock or option investor, here are some common traits:

  • Stock investors typically will look at the fundamentals of the company as well as the relative price of the shares compared to their historical levels. Stock investors are interested in the price of the shares as well as the performance of the company. Stock investors may be short-term traders or long-term investors.
  • Options require less money than the shares of the underlying stock. Options traders often are those who want to profit from the price movement of a particular stock without having to own the stock itself.
  • It is common for investors to utilize both stocks and options. As an example, an investor who owns a stock might write options as way to make some additional money from the stock. Or they might purchase a put option to hedge against a drop in the stock’s price. There are many strategies investors can use that combine owning stocks and trading options to enhance their overall investing returns.

Bottom line

Investing in stocks and trading options are not mutually exclusive. In fact, options can be used as a method to complement your stock trading activities. Call options can be a way to speculate on the price of particular stock without having to commit the capital to buy the shares. Conversely, put options can be a good way to hedge against a drop in the price of a stock in which you currently hold shares.

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SIMPLE IRA Contribution Limits 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

SIMPLE IRAs are tax-advantaged retirement savings accounts that benefit small business owners and the people who work for them. In addition, you can use the SIMPLE IRA to save for retirement if you are self-employed. Like many other retirement savings vehicles, SIMPLE IRAs are subject to annual contribution limits.

SIMPLE IRA contribution limits

The annual SIMPLE IRA contribution limits for employees and employers in 2020 are as follows:

Annual SIMPLE IRA Contribution Limits

Employees under the age of 50

$13,500

Employees 50 years and older

$13,500, plus $3,000 in catch-up contributions

Employer matching contributions

Up to 3% of employee’s salary

Employer non-elective contributions

2% of the employee’s salary

SIMPLE IRA contribution limits 2020 for employees

For 2020, the amount employees may contribute to a SIMPLE IRA plan is capped at $13,500 per year. That’s an increase from 2019’s limit of $13,000, and an even bigger leap from the $12,500 limit imposed from 2015 to 2018.

It’s worth noting that for employees who are also participating in other employer-sponsored retirement plans, such as 401(k) or 403(b) plans, aggregate annual contributions to all plans cannot exceed $19,500 in 2020. For those 50 and older, the overall annual limit for catch-up contributions is $6,500 for 2020, for a total ceiling of $26,000.

SIMPLE IRA contribution limits 2020 for employers

If a small business owner chooses to offer a SIMPLE IRA plan, they are required to make contributions to their employees’ accounts. They may choose to either match their employees’ contributions, up to a certain limit, or make non-elective contributions.

If an employer chooses matching contributions, their match is capped at 3% of an employee’s annual compensation. While an employer can make matching contributions of less than 3%, the match cannot be less than 1% of the employee’s annual compensation — and it cannot be less than 3% for more than two out of five consecutive years.

If an employer chooses non-elective contributions, they are required to put money into their employees’ SIMPLE IRAs regardless of whether the employees themselves make contributions. With non-elective contributions, the employer must make fixed contributions of 2% of their employees’ compensation. For 2020, the maximum amount of an employee’s total compensation that can be considered for calculating a non-elective contribution is capped at $285,000, up from 2019’s cap of $280,000.

What are the contribution deadlines for a SIMPLE IRA?

Employers are required to deposit their employees’ SIMPLE IRA contributions within 30 days after the end of the month in which those contributions were withheld. Employers are required to make their matching or non-elective SIMPLE IRA contributions by their tax return filing deadline, including extensions.

For people who are self-employed, the deadline for depositing SIMPLE IRA contributions for a calendar year is 30 days after the end of year, or Jan. 30.

SIMPLE IRA contribution limits vs. Roth contribution limits

While SIMPLE IRA contributions are capped at an annual limit of $13,500, annual Roth IRA contribution limits are much lower. For 2020, Roth IRA contributions are capped at $6,000, with an additional $1,000 allowed for catch-up contributions for those 50 and older.

Another differentiating factor of Roth IRAs is that they have income phaseout limits. Depending on how much you make, you may be limited to how much you can contribute or whether you can contribute at all. For 2020, single filers cannot contribute to a Roth IRA if they make more than $139,000, and if married and filing jointly, you’re only able to contribute if you earn less than $206,000.

Can you contribute to both a SIMPLE IRA and a Roth IRA?

You can contribute the maximum allowed amounts to both a SIMPLE IRA and a Roth IRA, as their contribution limits are not cumulative. In fact, most financial advisors recommend you max out both your SIMPLE IRA and Roth IRA if you can afford to do so, as they offer different tax benefits.

While SIMPLE IRA contributions are made pre-tax, and therefore lower your taxable income, your Roth IRA contributions are made with after-tax dollars, so qualified distributions are tax-free.

“Advisors talk about diversification all the time, and usually they are talking about stocks and bonds,” said Gregory Kurinec, a certified financial planner with Bentron Financial Group in Downers Grove, Ill. “But investors will want to diversify their accounts into different tax categories as well. By having a combination of pre-tax (SIMPLE IRA), after-tax advantage (Roth IRA) and non-qualified, this will allow the investor to pick and choose which account to take funds from to best impact their tax situation.”

What is a SIMPLE IRA?

A SIMPLE IRA is an effective retirement savings match plan, especially for small business owners. SIMPLE IRAs are available to small businesses with 100 employees or fewer.

SIMPLE IRAs require employers to make contributions on behalf of their employees, either up to 3% of their employee’s compensation as an employer match or a flat 2% of the employee’s compensation.

As with most financial products, when it comes to saving for your golden years, a SIMPLE IRA is just one of the many options available to you. Explore all of the options at your disposal when deciding how to build your nest egg.

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Review of Altfest Personal Wealth Management

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Altfest Personal Wealth Management is an investment management firm based in New York City. The firm typically only accepts clients with a minimum investment of $1 million. For these high net worth clients, Altfest Personal Wealth Management provides customized investment portfolios with comprehensive financial planning services. The firm has 16 employees who provide investment advisory services, and currently oversees $1.21 billion in assets under management (AUM).

All information included in this profile is accurate as of February 10th, 2020. For more information, please consult Altfest Personal Wealth Management’s website.

Assets under management: $1,210,000,000
Minimum investment: $1 million (waivable at the firm’s discretion for young professionals)
Fee structure: A percentage of AUM, ranging from 0.50% to 1.40%, depending on account size; hourly fees; fixed fees
Headquarters: 445 Park Avenue
Sixth Floor
New York, NY 10022
www.altfest.com
212-406-0850

Overview of Altfest Personal Wealth Management

Dr. Lewis Altfest launched Altfest Personal Wealth Management in 1983. He is still the majority owner of the firm and acts as CEO. He runs the organization along with his wife, Dr. Karen Altfest, the firm’s executive vice president, and their son, Andrew Altfest, the firm’s president. Both Lewis and Karen hold Ph.Ds; Lewis is an associate professor of finance at Pace University.

Including the Altfests, the firm has 37 total employees, 16 of whom provide investment advisory services. Altfest Personal Wealth Management specializes in creating customized, actively managed investment portfolios for high net worth clients. The firm and the Altfest family have won numerous awards for their performance, and both Lewis and Karen are regular contributors to financial news programs and publications.

What types of clients does Altfest Personal Wealth Management serve?

Altfest Personal Wealth Management primarily works with individual investors. A client usually needs a portfolio of at least $1 million to open an account with the firm — however, Altfest does make exceptions to this account minimum for “young professionals” who they believe will become high net worth clients in the future. The firm’s individual client base is currently split 40/60 between individuals and high net worth individuals, with the SEC defining high net worth individuals as those with at least $750,000 under management or a net worth of at least $1.5 million.

While the firm works with a diverse range of clients, it specializes in advising women, executives and healthcare professionals. In addition to individual investors, Altfest Personal Wealth Management also works with pension plans, profit-sharing plans, trusts, estates, corporations and other business entities.

Services offered by Altfest Personal Wealth Management

Altfest Personal Wealth Management specializes in investment management and financial planning. However, the firm’s investment management services are available to individuals and small businesses only; these services are not offered to investment companies, pooled investment vehicles, large businesses and institutional clients.

Most of the firm’s investment accounts are run on a discretionary basis, meaning that Altfest Personal Wealth Management advisors can make trades on behalf of the client. The firm does have a few nondiscretionary accounts, where the client must approve all trades themselves.

If a client only wants a few investment recommendations, rather than the management of their entire portfolio, the firm can provide this service as well.

Altfest Personal Wealth Management also offers comprehensive financial planning, as many of its advisors hold the certified financial planner (CFP) designation, a professional certification for financial planners. The firm’s financial planning services include the creation of a detailed financial plan outlining the necessary steps to achieve their goals and objectives. The plan can address specific areas, such as college savings, estate planning and debt management.

More specifically, Altfest’s services include:

  • Investment advisory services and portfolio management (mainly discretionary but some non-discretionary)
  • Financial planning
    • Retirement planning
    • Trust and estate planning
    • Charitable planning
    • Education planning
    • Tax planning
    • Cash flow forecasting
    • Budgeting and strategic planning
    • Long-term care planning
    • Debt management
    • Divorce planning
  • Insurance and risk management
  • Workshops and seminars
  • Newsletters and publications

How Altfest Personal Wealth Management invests your money

Altfest Personal Wealth Management builds unique, customized portfolios for each client based on their time horizon, risk tolerance, income level and long-term goals.

As part of this analysis, the firm follows a system called Total Portfolio Management. Rather than only looking at a client’s investment history, the firm also gets to know their entire financial plan, including income, debts, spending requirements and future earnings potential. The firm uses this information to finetune a portfolio comprised of stocks, bonds, mutual funds, ETFs and private funds.

Altfest Personal Wealth Management follows an active investment approach: this means the firm is regularly trading in an attempt to earn above-average portfolio returns.

Fees Altfest Personal Wealth Management charges for its services

For portfolio management services, Altfest Personal Wealth Management charges a fee based on a percentage of assets under management, with the rate ranging from 0.50% to 1.00%, depending on the size of the client’s portfolio. Altfest does not charge trading commissions or performance-based fees.

Portfolio Size Annual Asset-Based Fee
First $3 million* 1.00%
Between $3,000,001 and $6,000,000 0.75%
Over $6,000,000 0.50%
*If a portfolio falls below $2 million in value at the end of the quarter, the firm will assess an additional 0.10% fee on top of the asset-based fee listed above.

For “young professional” clients who don’t meet the firm’s portfolio minimums, Altfest charges the following fee schedule:

  • In the first year, the firm charges an annual fee of either 1.10% of assets under management or $2,500 whichever is greater.
  • After the first year, the firm charges 1.10% of the portfolio value or $1,500 per year whichever is greater.

This rate includes cash flow analysis, investment analysis, investment management and 401(k) recommendations. Clients who want additional financial planning services will be billed at a rate of $250 per hour.

If a client only wants standalone investment recommendations, Altfest Personal Wealth Management charges either an hourly fee ranging from $500 to $800 an hour, or a fixed fee of at least $3,500 for specific investment recommendation requests.

Finally, some of the investments included in Altfest’s portfolio recommendations may carry additional fees. Clients are responsible for covering these costs, though the money won’t go to Altfest Personal Wealth Management.

Altfest Personal Wealth Management’s highlights

  • Wide range of awards: Over the past few years, Altfest Personal Wealth Management has been recognized as a top investment advisor by publications including Barron’s, Forbes, Financial Times and Financial Advisor magazine.
  • Highly educated management team: The heads of the firm, Dr. Lewis Altfest and Dr. Karen Altfest, both hold Ph.Ds; Lewis is also an associate professor of finance at Pace University. In addition, many of the financial advisors at the firm hold the CFP designation.
  • Customized investment approach: Altfest Personal Wealth Management designs a customized portfolio for every client, tailored to their specific needs, and don’t lump people into one-size-fits-all funds as some firms may do.
  • Extensive financial planning in addition investing: Altfest Personal Wealth Management also specializes in financial planning. When the firm creates a portfolio recommendation, it goes over a client’s entire financial situation before designing the portfolio, not just their existing investments.
  • Specialty in advising women, executive and healthcare clients: The firm specializes in advising women, executives and professionals in healthcare. Additionally, Forbes named Dr. Karen Altfest one of the top women advisors in the country in 2017, 2018 and 2019.

Altfest Personal Wealth Management’s downsides

  • Above-average investment fees: Altfest Personal Wealth Management charges an annual 1.00% asset-based fee on the first $3 million in a client’s account (plus an additional 0.10% per quarter if their portfolio value falls below $2 million). In comparison, the median investment management fee charged by firms for accounts over $2 million is 0.75%, according to Kitces.
  • High minimum to open an account: It takes at least $1 million to open an account with Altfest Personal Wealth Management. While the firm does waive the minimum at its discretion for “young professionals,” the typical investor would need to be quite wealthy to make use of the firm’s services.
  • Only has one location in New York City: The only way to visit the Altfest Personal Wealth Management office in person is in New York City, the firm’s only location.

Altfest Personal Wealth Management disciplinary disclosures

Whenever an SEC-registered firm or its employees or affiliates face disciplinary action, including a criminal charge, a regulatory infraction or a civil lawsuit, the firm is required to report that incident in its Form ADV, paperwork filed with the SEC. Altfest Personal Wealth Management reports in its Form ADV that it has faced no such incidents over the past 10 years, indicating a clean disciplinary record.

Altfest Personal Wealth Management onboarding process

To start the onboarding process with Altfest Personal Wealth Management, you can request a free consultation with one of its advisors. You can contact the firm either by phone at 212-406-0850, by email at [email protected] or by filling out a form on the firm’s website. As part of the onboarding form, the firm asks you to share your story, which helps the firm start determining whether you are a good fit based on your income and profession.

If it seems like a good match, the firm’s advisors will then get to work designing your customized investment portfolio based on your goals, risk tolerance and overall financial situation. When you’re ready to launch, the firm’s advisors would then take care of opening your new accounts, transferring over your existing accounts, making the necessary investments and keeping up with the records for your portfolio.

The bottom line: Is Altfest Personal Wealth Management right for you?

If you’re a high net worth individual or a young professional who wants personalized investment recommendations combined with financial planning, Altfest Personal Wealth Management could be a good choice. This may be especially true if you are in one of the firm’s specialty client categories: women, executives and healthcare professionals. Since Altfest Personal Wealth Management only has one location in New York City, however, the firm might be a better choice if you live in the Northeast rather than other parts of the country.

On the other hand, Altfest Personal Wealth Management’s comprehensive services do not come cheap. The firm’s fees are higher than average, and you’d need at least $1 million to open an account (unless Altfest waives the minimum because you’re a young professional). If you want a simpler investment strategy or prefer to manage your portfolio more on your own, you could find less expensive advisors than Altfest Personal Wealth Management.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.