Money Management

If you’re clueless about stocks, here’s what you need to know. 

Once you’ve built up a solid emergency fund, you may be ready to start investing your money in stocks. You can do so by opening a brokerage account, and you can also buy stocks in a retirement plan. Though 401(k) plans generally don’t allow you to hold stocks individually, you can hand-pick stocks in an IRA account.

But what exactly is the stock market and how does it work? If that’s something you’re wondering about, don’t feel embarrassed. You’re better off getting an explainer and knowing what you’re getting into, especially since stocks can be a risky investment. Here’s what you need to know.

What is a stock?

Not every company trades publicly. But companies that do trade publicly issue stock that you can buy shares of. When you own a share of stock, you own a piece of the company in question.

How does the stock market work?

The stock market refers to the broad mix of stocks that’s available for investors to buy and sell, and the different exchanges where stock shares are traded. You wouldn’t be able to go “visit the stock market,” but you can visit the New York Stock Exchange, for example, which is located on Wall Street.

When you read about stock news, you’ll often see things like “Wall Street did this” or “Wall Street did that.” To be clear, this is just another way of referring to the actions taken by stock market investors as a whole.

You should also know that the stock market consists of a number of indexes that are used as benchmarks to measure its general performance. Once popular index is the S&P 500, which consists of the 500 largest publicly traded stocks on the market.

Another popular index is the Dow Jones Industrial Average, which tracks 30 of the largest U.S. companies. There’s also the Nasdaq, which consists largely of, but is not limited to, tech stocks.

Of these three indexes, the S&P 500 is most commonly used as a measure of the total stock market’s performance, even though there are stocks available to be bought and sold that are not part of the S&P 500. So when you hear something like “the stock market fell today,” that might really mean that the value of the S&P 500 index declined.

How do you make money by investing in stocks?

The price of any given stock can fluctuate from day to day. And stock prices can change based on factors such as news events or financial events that are specific to individual companies.

For example, stock prices might fall on a whole if an economic indicator points to a near-term recession. If a specific company releases earnings data and it’s negative, that company’s share price might decline, even if the broad stock market does not decline at that time.

To make money in the stock market, your goal should be to buy quality stocks and hold them long enough so that their share prices gain value over time. While it’s possible to make money in stocks over a shorter period of time, because the market can be very volatile, a long-term approach is better.

As an example, let’s say you buy 10 shares of a given company at $100 apiece, for a total investment of $1,000. If, over 20 years, the value of those shares rises to $500 apiece, you’ll be sitting on a stock portfolio worth $5,000. If you sell those stocks at that point, you’ll walk away with a $4,000 profit.

You should also know that some stocks pay dividends. When companies make money, they can choose to either reinvest it in the business or share it with stockholders. When they go the latter route, it results in dividend payments, which is basically extra income and another way to make money in the stock market.

How do you buy stocks?

Most people who buy stocks today do so in a retirement plan or brokerage account. Usually, this means opening an app or website, logging into your account, entering the company name or stock symbol (also known as a ticker) of the company you want to buy, and indicating how many shares you want.

Your brokerage account interface will let you know what price you’ll be buying at (based on what prices look like at the time), and once you click the “buy” button (or whatever similar button your account uses), those shares will be added to your account. At that point, you’ll have the option to hold your stocks or sell them.

You should also know that many brokerages allow you to buy shares on a fractional basis. This means that if a company’s stock is trading for $100 a share but you only want to invest $50, you can buy half a share instead.

How do you know which stocks to buy?

Well, that’s the tricky part. You never know when an otherwise strong company might falter in the future, leading to a lower share price. Your best bet, however, is to research different companies to get a sense of how they operate and what financial advantages they have. You may want to focus on companies that manage their cash flow well, have little debt (or debt that’s under control), and have a lot of growth potential.

The good news is that publicly traded companies are required to disclose financial information on a regular basis. So you don’t need to guess at how much cash reserves a given company has — you can access that information and use it to help guide your decisions.

As a general rule, it’s a good idea to buy and hold stocks across a range of market sectors. This means that rather than buying 20 different tech stocks, you should instead buy a few tech stocks, a few bank stocks, a few energy stocks, a few healthcare stocks, a few retail stocks, and a few auto stocks, just as an example.

The more diverse a stock portfolio you have, the more protection you might buy yourself against losses. That’s because if one market sector takes a hit, your assets will be spread out across many others. A diversified portfolio could also be your ticket to helping your portfolio grow.

Finally, you should know that you can invest in the stock market without buying individual stocks. Instead, you can load up on exchange-traded funds, or ETFs, which are funds that trade publicly.

Some ETFs focus on a single market sector, while others, like S&P 500 ETFs, aim to track the performance of the broad market. Owning ETFs is a great way to diversify your portfolio without having to do the level of research required to buy stocks individually.

And there you have it. That’s the stock market in a nutshell. Hopefully, you’re now feeling more comfortable with the idea of buying stocks. And if not, ask questions. There’s no such thing as too much financial education.

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Yet more evidence you may not want to believe everything you read on social media. 

If you’ve been on Facebook recently you may have noticed a seductive new ad. It looks like an IRS webpage and claims that the government now offers “health credits” to help Americans pay for groceries and other necessities.

But you must act fast. According to the ad, “Today is the last day for Americans to get $540/month thanks to this new gov benefit. Click below to claim.”

So far, it seems intriguing. There’s a picture of a U.S. Treasury check and references to the American Rescue Plan.

However, it’s a scam. Here’s what you need to know to protect yourself.

They sandwich a lie between facts

The American Rescue Plan did include subsidies that lowered healthcare costs for 13 million qualifying Americans. And then when the Inflation Reduction Act was signed by President Biden in August 2022, some American Rescue Plan benefits were extended.

Unless someone studied the American Rescue Plan or subsequent extension closely, there’s a good chance they remember just enough about the inclusion of health benefits to make the Facebook ad feel relatively legit.

By burying the scam between actual facts, scammers know that they’ll snag a few more victims.

It’s possible that some people simply want to believe it. Healthcare in the U.S. is expensive and millions carry no insurance to help reduce the costs. An advertisement promising hundreds of dollars a month in health credits is sure to capture attention. This may be particularly true because the scam is directed at those earning less than $50,000 annually.

No matter how much we earn, though, everyone wants to lower their medical costs.

Garden variety propaganda

While the word “propaganda” may bring political campaigns to mind, it’s a technique used throughout society. The goal of propaganda is to influence people’s opinions and behaviors. In this case, the scammers want people to click on their link.

The ad mentioned above is part of a series of identical ads, meaning the scammers are employing one of the most common types of propaganda, called “ad nauseum marketing.” Using ad nauseum marketing, scammers target the same audience repeatedly, hoping to stay fresh in their minds.

You’re led down a different path

The ad promises that you can claim your health credits and what they call “free stimulus payments” from the federal government in exchange for taking a simple quiz. It’s only after following a link that you land on a page revealing that the “advertised benefits are not government aid.”

Where are they taking you? In this case they’re trying to sell you insurance. Specifically, a Medicare supplement plan. These supplemental plans are not connected to or endorsed by the government or Medicare. Rather, they’re sold by large insurance companies.

The scammers know that you may not need supplemental insurance, but figure that some of the people who follow them down the rabbit hole will. That’s why they invite everyone to click on a large green link. To sweeten the pot, the ad says that those who follow the link can activate free health benefits “starting this week.”

Tip: It’s important to note that credible insurance companies will not attempt to trick you into buying a policy.

Telltale signs it’s a scam

Here are a few indications that you’re being scammed.

URL inconsistencies: According to research conducted by AFP Fact Check, the advertisement claims to offer new government benefits. However, the link directs people to “givebackhotline.com” rather than the expected “.gov.”Poor writing: There are many brilliant people who don’t happen to be great writers. Still, poor writing is often a hallmark of scams. In this scam, poor punctuation was a dead giveaway.Unnecessary urgency: Scammers don’t want to give people too much time to critically consider what they’re getting themselves into. And it’s for that reason that you’ll see comments like, “Act Now!” or “Today’s the last day.”

Bottom line: Speaking with AFP, Kathy Stokes, director of fraud prevention programs at AARP, says that we should assume that any post on social media promising a new government benefit is a fraud.

It’s about money

Every scam is different. Some lie to sell a product. Others use the personal information you provide to steal your identity. No matter how they go about it, scamming is always about separating you from the money in your bank account.

You can make it harder to steal from you by ignoring suspect ads and never clicking on one of their links.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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Selling I bonds can free up some cash, but there might be a cost to consider. 

Many Americans bought Series I savings bonds, or “I bonds,” over the past year or so as a way to protect their money from inflation and keep it away from the stock market. And it’s easy to see why — even after the I bond interest rate dropped a few months ago, these still offer a guaranteed 6.89% annualized initial return on your money for new buyers. That’s significantly better than any CD account we know of.

However, if you’re thinking about cashing out your I bonds, there are some key drawbacks you need to consider. So, here’s what you need to know.

Can you sell your I bonds?

The good news is that there is a very liquid market when it comes to I bonds. This means you can sell them quickly and easily. If you have electronic I bonds, simply go to your TreasuryDirect account, go to ManageDirect, and use the link for cashing a bond. You can cash out your entire I bond, or you can do it in partial amounts as long as you leave at least $25 in your account. Paper I bonds can be cashed out in full, either at your bank (most branch-based banks will cash savings bonds) or directly through the Treasury Department by mail.

However, it’s important to keep one thing in mind. I bonds cannot be redeemed at all until at least one year from the issue date. In other words, if you haven’t held your I bonds for at least 12 months, there’s no way to get your money yet.

Redeeming I bonds after one year

After one year has passed since the issue date, you have the ability to cash or redeem your I bonds through the methods discussed earlier. However, if fewer than five years have passed since the issue date, there is a penalty. By cashing in during the one-to-five year window, you’ll forfeit the last three months’ worth of interest the bond earned.

This can be a rather costly penalty in some cases. For example, let’s say you bought $10,000 worth of I bonds three years ago. They’ve been accumulating interest at a rate of 6.49% for the past three months. By redeeming your bonds now, you’d still get significantly more than you initially paid thanks to the past year’s inflation adjustments. But because you’re still within the five-year window, you would get hit with a forfeited interest penalty of more than $160.

Keep in mind that the penalty is based on the last three months of interest, so it’s a bigger issue during high-inflation periods. If you hold I bonds, and a year or two from now they’re paying 1% or 2%, the penalty is significantly less.

As a final note, if you redeem your I bonds after five years have passed since the issue date, there is no penalty at all. You will receive the amount you paid plus all of the interest that has accumulated.

Should you still redeem your I bonds before five years?

The bottom line is that the early redemption penalty for I bonds isn’t necessarily a deal-breaker if you need the money to cover expenses or because you find an opportunity to invest the money elsewhere. However, it should definitely be taken into consideration, especially during times of elevated inflation, as three months’ worth of interest could be a significant amount of money.

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It’s important to know what to expect. 

Having life insurance is extremely important. Without it, your loved ones might struggle financially upon your passing.

But life insurance is also an ongoing expense you’ll need to bear. And you may reach a point when you start to struggle to keep up with your life insurance premium costs.

In fact, you may already be in that situation today. A lot of people are struggling to keep up with their bills in general due to inflation. So if you’re having a hard time putting food on the table, you may have to prioritize that over your life insurance premiums.

Now, as you might imagine, failing to make your life insurance premium payments could have negative consequences. But those consequences will hinge heavily on the type of policy you have and its specific waivers and rules.

The consequences can vary

If you stop paying your cable bill, at some point, your cable company is going to stop providing you with that service. Similarly, your life insurance company might have to pull your coverage if you can no longer afford your premiums and you stop paying them.

But just because you’ve run into affordability issues doesn’t mean you’re doomed to lose your life insurance coverage. For one thing, it’s pretty common for life insurance companies to give policyholders a 30-day grace period for making premium payments. So if your next payment is due on March 30 and you don’t make it on time, but you manage to come up with the funds by the end of April, you may not see your coverage lapse.

What’s more, if you reach out to your life insurance company and explain that you’ve run into a financial hardship, they might agree to extend your grace period or work with you in another way. So it’s worth making that call.

Meanwhile, some life insurance policies have a waiver of premium rider added on. This rider allows you to stop making payments if you become disabled without losing your coverage. If your policy has this rider and you can no longer afford your premiums because a disability is interfering with your ability to earn money, you may be covered.

If you have whole life insurance, and have held your policy for a number of years already, you may have accumulated a cash value. You can generally use that cash value to cover your premium costs if you can’t pay yourself.

Along these lines, with whole life insurance, you could opt to cash out your policy once your premiums are no longer affordable to you. That way, you’ll get some financial benefit — but then you also won’t have life insurance anymore.

Make sure your life insurance premiums work for your budget

Running into affordability issues with life insurance could result in lapsed coverage. So it’s important to make sure you can swing the cost of your premiums and that they aren’t too much of a stretch for your budget.

Generally, you’ll spend a lot less on term life insurance than on whole life insurance, so opting for the former is a great way to keep your premium costs down. Also, don’t overbuy coverage. If you earn $60,000 a year, you may want a life insurance policy that replaces your salary 10 to 20 times over. But you don’t necessarily need a $2.5 million benefit from your policy, and opting for one is apt to result in higher premium costs.

Finally, shop around with different life insurance companies when you’re in the process of putting coverage into place. That move alone might help you avoid a scenario where you stop being able to afford your premiums.

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Forget location, location, location. It’s budget, square footage, and yard size for me! 

It’s so commonly spouted, it’s basically the mantra of real estate. Yes, that’s right: Location, location, location!

But, realistically, how important is location, exactly? Is it really the vital component it’s made out to be? Or is it something that, like brass bathroom fixtures, belongs in the era of yesteryear?

Once upon a time, location was indeed everything when buying a house. But in today’s world, where anything can be delivered in a few taps of the screen, I think this obsession with location may be a bit outdated.

Location counts — to an extent

I don’t want to say that location isn’t at all important, because that’s certainly not true. Where you live has a huge impact on everything from which schools your children can attend to whether the women in the family can have bodily autonomy.

And, as I’ve heard many folks say, you can’t move a house (most of the time; I’ve seen it done now and then, but it looks expensive!). The perfect house in a terrible location isn’t so perfect after all.

So, yes, location is important, to an extent. But at the point you’re getting a larger mortgage loan to live one block over, or you’re limiting yourself to a strict two-square-mile radius and ignoring whole swaths of potential dream homes…well, that’s when it’s getting out of hand.

Determining your location priorities

Rather than prioritize location above all else, instead we should be carefully considering what aspects of location are the most important.

For example, say you’re interested in a certain area because it has a good school. Great, but don’t hyperfocus. Do a bit of research. Chances are good there’s more than one decent school in the general vicinity of where you want to live. This may open up more possibilities than focusing tightly on one small area.

Commuting is another big factor. While most of us wouldn’t add an hour to our daily drive just for a nicer house, you shouldn’t ignore whole areas because of an additional few minutes. And if you’re one of the folks who still gets to work from home, then distance to the office may not even be a priority at all (but good internet access will be).

There are lots of other aspects of location to consider, like crime, walkability, and proximity to family and friends. These are all good reasons to prioritize a certain location — so long as you understand how it impacts your other priorities, like house size and home-buying budget.

How location impacts daily life

In the end, I’d argue that the house is more important than the location (provided the location doesn’t make your life actively worse).

Most of us spend the bulk of our time in our homes. So if you end up a few minutes further away from the good restaurants or the chain store you prefer, well, how much is that really going to impact your daily life?

For me, at least, having a house of a decent size, with space for a home office and a yard large enough to garden, is well worth driving an extra five minutes to the grocery store once a week or even another twenty minutes to see family on the weekend.

Could I buy a home closer to these locations? Certainly. But it would either cost more, or result in buying much less house (or, realistically, both), which would impact my daily life far more than a little distance will.

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If it doesn’t, then it may be time to re-run those numbers. 

It’s hardly a secret that inflation has been battering consumers for well over a year now. And it could be quite some time before living costs start to come down to more moderate levels.

In light of that, it may be time to reassess your budget and spending, and to consider cutting back on certain non-essential expenses, whether it’s the streaming service you only watch on occasion or the gym membership you can really do without. But it may also be time to reevaluate your emergency fund.

Does your emergency fund still cut it?

As a general rule, it’s important to have enough money in your savings account to cover at least three months of essential expenses. That way, if you were to lose your job, you wouldn’t immediately need to resort to credit card debt to cover your bills while you look for work.

Now, you might be sitting there thinking, “Hooray, I’m in great shape, because my savings are loaded up enough to cover three months of bills.” But in that case, you need to ask yourself when you last calculated your emergency fund.

If it was a year ago, the cost of covering your bills might be higher now. And that could mean that your emergency fund doesn’t quite cut it after all.

So, let’s say you last calculated your emergency fund needs at the start of 2022. It could be that back then, between your rent, car payments, food costs, and other essential expenses, you were spending $3,000 a month on bills. So you might think you’re in great shape if you have $9,000 in savings.

But remember, living costs are up these days compared to a year ago. In January, inflation was up 6.4% on an annual basis as per that month’s Consumer Price Index. And grocery costs alone were up 11.3%.

Now, let’s go back to that $3,000 a month in bills. Perhaps these days, you’re really spending more like $3,200 a month due to inflation. In that case, you’d actually need $9,600 in the bank to cover a full three months’ worth of bills.

To be clear, if you have $9,000 in that scenario, you’re still in great shape — especially considering that many Americans have no money in savings at all. But once you re-run those numbers, it might prompt you to push yourself to save another $600 so you truly have the protection you want and need.

Keep assessing your expenses

You don’t necessarily have to recalculate your bills for emergency fund purposes every month. But it is a good idea to reassess your spending at the start of each year and see what your monthly bills look like.

You may end up having to boost your emergency fund modestly to ensure that you can really cover three full months’ worth of costs. But it’s an effort worth making — and one that might really come in handy if you were to actually lose your job.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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