Investors may purchase individual stocks as a plan for retirement: simply open a brokerage account with a stock broker and pay the broker a commission for each purchase or trade. Individual stocks offer high returns or devastating losses depending on the stocks you choose and the volatility of the stock market. If you choose to invest in individual stocks, financial service providers such as USAA recommend that you minimize risk through a diverse investment strategy.
If you purchase stock in successful companies, you may receive two forms of income: capital gains occur when the value of your stock is greater than what you paid for it, and some corporations pay their stockholders quarterly cash or stock dividends when they record a profit. The average annual rate of return is higher for stocks than for other investments, and purchasing individual stock offers the chance of high profits to investors.
While stocks offer the highest possible returns, they also offer the highest possible losses. Once you open a brokerage account to begin buying individual stock, you must conduct research and invest on your own. If you are unfamiliar with the stock market, you could make mistakes that eliminate a significant amount of your retirement savings. Financial service providers such as USAA recommend that you minimize risk by investing in several different industries and never placing more than 10 percent of your savings in one stock.
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Buying individual stocks for retirement works well for young investors who can afford to explore high-risk investments and have the time and energy to research the most worthwhile stocks. Historically, stocks have recorded higher gains than bonds over the long term. Converting gains from high-risk stocks to more modest investments as you age is a strategy that protects assets when you need them.
Most individual retirement accounts (IRAs) do not have specific rules guiding how you invest your money, so purchasing individual stocks is an option: some brokerage firms may even offer a lower minimum investment for IRAs. Money invested in stocks through an IRA incurs no tax liability, but watch out for high transaction fees and maintenance fees. Roth IRAs and SEP-IRAs also support investment in individual stocks. If your employer allows a self-directed brokerage for your 401k retirement account, then you may also purchase individual stocks through your 401k; capital gains in these accounts have tax-deferred status.
Investors wary of placing their futures directly in the volatile stock market by purchasing stock themselves may invest in stocks indirectly through mutual funds or exchange-traded funds, which purchase or trade diverse stocks on your behalf in exchange for fees. While these alternatives offer lower potential returns than individual stocks, they are also a more secure investment.
- "The Complete Idiot's Guide to 401k Plans"; Wayne C. Bogosian et al.; 2002