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How Stock Trading Works

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.

Ready to start trading stocks? Start by answering a few simple questions: Is your retirement plan humming along with regular monthly contributions (at least as much as your employer matches)? Do you have little to no high-interest rate debt? How about plenty of excess cash beyond your emergency fund?

If you check all those boxes, it may be the right time to start trading stocks. Trading stocks — actively buying and selling portions of ownership in companies — can bring you closer to your favorite corporate brands, it can make you feel powerful and, if the timing is right, there is great potential upside. However, stock trading can also be risky and incredibly difficult to do well, so it helps to be deliberate and know how trading works before you buy your first stock.

What is stock trading?

First, it helps to define a few terms. A share of stock represents a portion of ownership in a company, and trading stock is buying and selling those shares. But how you purchase stocks, and how often, will put you into one or more of the following categories:

Stock investing is owning shares of stocks. You may be invested in a portfolio of stocks through a mutual fund or index fund, hold some individual shares in a long-term retirement account or own shares of your employer’s stock.

Stock trading or active trading involves shorter-term buying and selling to take advantage of market opportunities.

Day trading means you buy and sell a single security within the same day, according to the Financial Industry Regulatory Authority (FINRA).

Pattern day trading means you conduct four or more “day trades” within five consecutive days, according to the SEC, although day traders often trade throughout the day, attempting to take advantage of any market moves. There are high barriers to entry to day trading, including the ability to maintain at least $25,000 in your account, according to the FINRA.

Pros and cons of trading stock

So why should the average investor want to trade individual stocks — or avoid them? Consider some pros and cons.

Pro. Trading stocks is exciting. Individual stocks represent companies, and trading stocks can feel like a thrilling stake in ownership of a favorite brand. As you research a company and get to know what moves its stock price, you may see patterns that help you find other companies with stock you can trade. You may not get that same sensation purchasing shares of a mutual fund.

Con. Trading stocks carries a higher risk than other types of investments. Buying a mutual fund or index fund, for instance, makes you the owner of an entire portfolio of companies, which reduces the risk of your overall investment. It’s harder to achieve the same level of diversification with individual stocks.

Pro. Stocks offer incredible potential for growth. The stock market has returned an average of about 10% per year historically, compared to around 5% annually for bonds. Individual stocks can be volatile, but can also achieve some amazing returns.

Con. A finance professor from Arizona State University recently crunched the numbers and found that most stocks are terrible investments. Professor Hendrik Bessembinder analyzed common stocks included in the Center for Research in Security Prices (CRSP) database since 1926 as long-term, buy-and-hold investments. The top-performing 4% of companies were responsible for the net gain of the US stock market since that time. The others? Most returned less than one-month Treasuries. Rather than try to select those few winning stocks, you might be better off buying the market’s performance with an index fund.

Pro. Unlike mutual funds, stocks don’t charge annual fees. Index funds charge an average 0.09% of your investment each year, just to be part of the fund. Active mutual funds take an average 0.59%, according to the Investment Company Institute. It may not sound like much, but for buy-and-hold mutual fund investors, these expenses add up over time.

Con. Stock traders pay brokerage fees when they buy or sell shares, which can also add up quickly if you trade actively. Over time, it’s possible the brokerage fees could have a similar impact on your investment as annual fund expense ratios.

How do you trade stocks?

What do you need to start trading stocks? The following will help get you started.

Excess cash. Start trading with money you can afford to lose. Because of the high-risk nature of stock trading, your first attempts may be unsuccessful or you could turn a profit early on. Avoid big bets until you’re comfortable in the market. “Think of it as Atlantic City money,” says Tom Henske, CFP with Lenox Advisors in New York. “I tell clients, if you want to do it, you should go in willing to lose half the money you invest. If losing $25,000 would be too much, then you shouldn’t invest $50,000.” Even if you’re a trading whiz, Henske says, “No single holding should represent more than 5% of an individual’s portfolio. If you have $100,000 in net worth, you should go in with less than $5,000.”

A brokerage account. Traders need an account to access and hold stocks. You can open an account through a brokerage, which can also provide access to a wide variety of bonds, mutual funds, exchange-traded funds and so on.

The type of broker you choose will depend on your needs. Large, full-service brokers offer trading advice but are sometimes known to aggressively push investments. If you’re looking for lower trading fees and a bit more freedom, an online discount broker may be more appealing. Online brokerages generally offer the same investment selection and trading capabilities. You may not get personal advice, but some online brokers offer things like third-party analyst research and tools to help compare stocks.
When comparing online brokers for stock trading, ask the following questions:

  • Are there trading fees or account minimums? There are reputable online brokers offering trades as low as $4.95 with no account minimums. Some companies charge a fee per share instead. If you plan to trade more complicated investments, such as options, compare those fees as well.
  • What are the trading capabilities? Some brokerages offer sophisticated investments (e.g. options, futures) and strategies (e.g. ladders, swaps). These are not for beginners, but they may of interest at some point, so compare the capabilities of different online firms to find what suits you.
  • Can I get help researching stocks? From video tutorials to company analysis and data to user-friendly tools that make complex trading easy, brokerages find different ways to engage and educate investors. Take advantage of as much information as you can.

Investment ideas. One of the biggest mistakes a trader can make is to seek out “hot stocks” or buy based on investment buzz. Instead, consider the strategies, sectors or companies that are of interest to you and start to build from there. Are you looking for companies in growth mode, or value stocks that pay regular dividends? Could you build a sector-like portfolio with a handful of stocks?

If you have companies in mind, a next step is to research their fundamentals. You can get to know the company’s price-to-earnings ratio, revenue and income. Also consider the competition, the company’s importance in the market, the executive management, operational efficiency and so on. Your brokerage platform may help connect some of these dots for you.

A buy/sell strategy. Do you plan to invest a lump sum? Or buy shares at regular intervals to create substantial positions over time? What are your goals for the money? How much risk can you afford to take? These are important questions for any investor to consider.

Additionally, give some thought to how long you will hold the stock or at what price you might sell it. In general, it helps to have a long-term outlook as an investor. Sometimes, however, there are reasons to sell. If prices for a stock spike, for instance, it may make sense to move money out of it. If share prices fall, you might consider buying more shares at a discount. Whatever your strategy, it should not be driven by panic or fear caused by dips or swings in the market.

A target share price. If you have your eye on a stock at a certain share price, you can set something called a limit order, instructing the broker to buy stock when it hits a specific share price. Alternatively, a market order can be made to buy shares at whatever the current price is.

There are also tools like stop-loss orders that allow you to determine an automatic price at which to sell your stock shares. These orders come at an extra cost, so use them wisely if at all.

4 things to know before you start stock trading

  1. Start virtually. Some online brokers offer virtual or “paper trading” accounts that let you practice trading before investing real money. If you’re not ready to sign up with a broker, search for a free online tool that lets you track a stock portfolio.
  2. Beware low-quality investments. Watch out for penny stocks, also known as microcaps, which let you trade companies with very low share prices. Penny stocks might sound like great deals, but they are volatile, oversold and can be downright sketchy. And remember, it’s not just the price of the investment that makes it cheap, but the price compared to what it’s worth.
  3. Time in the market > market timing. Even the sharpest investor sentiment is slow compared to the market’s speed. It’s not easy to keep up. Consider a longer-term buy and hold strategy when trading stocks.
  4. Watch the margins. Some brokerages will allow you to pump up the number of shares you purchase by lending you the funds to do it. It’s known as a margin account, and it increases your risk because you can lose more than you have invested. The Securities and Exchange Commission has some recent guidance on margin accounts to consider before opting for this type of account.

3 simple alternatives to stock trading

Still not sure whether to start stock trading? There are simpler ways to try and make money in the market. Consider the following stock trading alternatives.

  • Exchange traded funds (ETFs). ETFs trade like stocks but offer broad market diversification. You can buy in for the cost of a single share (plus trading costs), with minimal annual fees.
  • Robo-advisors. These automated financial advice algorithms use your responses to a simple questionnaire to help you build a low-cost investment plan.
  • Index funds in a Roth IRA. It may sound boring, but a Roth IRA offers serious tax advantages for longer-term, eligible investors. You can trade anything within a Roth, but a stock index fund is easiest and can provide the performance of the larger market at a low annual fee.

Stock trading is just one tool in a wealth-building arsenal — and not the most effective for the average investor, says Henske. “There’s so much transparency in today’s markets, it’s very hard for even a professional money manager to beat an index,” Henske says. “When you trade stock on your own, you’re saying you know more than the markets know. It’s not easy to do.”

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.

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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.

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Your 401(k): Handling Interest Rate Ups and Downs

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.

Businesswoman examining documents at desk
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With any change in the economy or your life situation, it is a good idea to review your investment portfolio, particularly your 401(k) plan, to make sure your investments are structured to meet your needs at retirement. This is especially true when interest rates are rising so you can take maximum advantage of those high rates. There’s also benefit to checking on your investments when rates are down; certain investments will actually be worth more and you can make a profit by selling or simply enjoy your higher-earning investments.

Interest rates rise and fall based on changes in the economy. The Federal Reserve (the Fed) may lower rates to support the economy when it’s going through a weaker patch and may choose to raise interest rates as the economy begins to gain strength.

Either way, there’s no need to panic. We’ll help you understand what happens to your 401(k) investments in either situation.

What to ask yourself when reviewing your 401(k)

A 401(k) is a savings vehicle that many companies make available to help their employees save for retirement. For tax year 2019, you have until April 15 to contribute up to $19,000 of your earnings into your 401(k) on a pretax basis, meaning anything you contribute is not taxed until you withdraw it, usually at retirement. For 2020, you can contribute up to $19,500.

Some companies match employee contributions up to a certain limit that varies by employer. These contributions are not taxable to you until you withdraw them. Companies offer employees a variety of 401(k) investment options. Some larger companies allow employees to choose from a dozen or more mutual funds, including various stock, bond and real estate funds.

While any time is a good time to review your 401(k) investments, a rise (or fall) in interest rates is a particularly good time to make certain your 401(k) investments meet your needs based on your age, years until retirement and risk tolerance, among other factors.

Virtually all 401(k) plans offer one or more fixed-income investment options. These typically include both government and corporate bonds of varying maturities. For example, a fund might offer a mutual fund that invests in short-term Treasury bills, one that invests in long-term Treasury bonds and one that invests in corporate bonds. Some companies might even offer a fund that invests in so-called junk bonds that pay a higher rate of interest in return for the risk of investing in low-quality bonds.

What to expect when rates rise

An increase in interest rates will eventually have an impact on the types of fixed-income funds in a 401(k). A fund that invests in short-term Treasury bills will react quickest to this change. When the bonds that the funds hold mature over the subsequent year, the fund manager will reinvest the proceeds in bonds that pay a higher rate of interest.

A corporate bond fund, on the other hand, includes bonds with varying maturities. It may take time for the fund to invest its assets in bonds that pay higher interest, as most fund managers spread their investments over maturities between one and 30 years so that at least some bonds are always maturing to potentially be reinvested at a higher rate.

A rise in interest rates also will affect the price of existing bonds in a portfolio. Say the corporate bond fund you own has an XYZ Company corporate bond that pays 4% interest. As market interest rates rise, the value of that bond will decline to a point where the current yield on that bond is closer to the market rate. Since most fund managers anticipate that interest rates will rise, they have structured their portfolios to minimize the impact that an increase will have on the fund’s value.

Let’s return to reviewing your 401(k) investments. When you started your job, you probably picked a mix of investments and haven’t made any changes. That’s fine if you started your job two years ago. But if you have been working for the same company for 10 years, a review is a good idea.

Let’s say that when you started working for the company at age 30, you were single and invested 90% of your 401(k) in stocks and just 10% in bonds. Now, fast-forward 10 years. You got married. And while retirement is still at least 25 years away, it is something you can begin to see on the horizon. It might be a good time to increase your fixed-income allocation to add greater stability to your 401(k) returns — especially if interest rates are rising.

What to expect when rates fall

It’s important to keep in mind that interest rates also can fall. The bad news is this typically happens when the economy isn’t doing so well. The good news is your higher-rate fixed-income investments will be worth more. You can choose to sell them and take the profit or hold them and enjoy earning a rate that’s higher than the one currently available.

Investing when interest rates are falling requires a different strategy. Young investors with many years until retirement who have the bulk of their 401(k) investments in stock should be able to ride out a period of low interest rates without significant impact.

Older investors who see retirement on the horizon or are already retired will find falling interest rates more problematic. Their investments may be concentrated in fixed-income vehicles, or they may be seeking solid long-term fixed-income investments to pay them the retirement income they need. Since nobody can predict how long rates will continue to fall, buying fixed-income investments with staggered maturities, sometimes called a bond ladder, is the best way to make sure you always have money available to take advantage of rising interest rates when they happen.

What’s ahead for 2020

The general expectation for 2020 is that market interest rates will continue to decline. The Federal Reserve has put the federal funds rate on an indefinite pause since its series of three rate cuts in the second half of 2019. In response, banks lowered their own rates and continue to do so overall.

If the Fed does make a change, it is largely expected to be another rate cut rather than a rate hike. This is thanks to outside risks to the economic outlook, namely weaker global growth, trade negotiations and the recent coronavirus outbreak. The Fed’s three rate cuts in 2019 were designed to support the U.S. economy in the face of these threats. If they continue to weigh on the economy, which is performing pretty well on its own, the Fed will be more likely to cut rates to continue that support.

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.