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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.”

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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 SizeAnnual Asset-Based Fee
First $3 million*1.00%
Between $3,000,001 and $6,000,0000.75%
Over $6,000,0000.50%
*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.