Brokerage Licenses 7, 66, 6, 24, 4
Insurance License | Personal linesFormer
Brokerage firms | E’Trade, JP Morgan, Merrill Lynch, Scottrade
When it comes investing in the stock market, one of the first decisions that investors have to make is deciding what type of account to establish. There are numerous types of accounts that can be opened with brokerage firms, and they have different rules and tax consequences associated with them.
First, lets take a look at the characteristics of an individual account. This is an account designed for investments, such as stock, preferred stocks, options, ETFs, and mutual funds. There can only be one name listed on this account and this type of account is taxable.
If you sell, a security within the account, or if you own a mutual fund, and that fund’s manager pays out capital gains, then you as the investor are responsible for paying taxes. You will be issued a 1099 IRS document in order to account for the taxes. The type of securities that are allowed to be bought and sold, does vary from firm to firm, so be sure to check the firms web site or, contact one of the firm’s brokers in order to see what securities can be traded.
Joint accounts are brokerage accounts that have at least 2 people listed on the account as account owners. Similar to an individual account, typically stocks, options, ETFs, bonds, and cds are securities that can be bought and sold within the account.
Sales within the account, are taxable events, thus the investor is required to pay taxes when they file with the IRS. Some brokerage firms and banks may allow access to credit cards associated with the account. Investors that decide to open joint accounts should strongly consider the associated risk of having someone else having the ability to negatively impact their credit score.
There are 3 types of joint accounts: Rights of Survivorship, Tenants in Common, and Community Property. Lets take a look at the characteristics of each.
Rights of Survivorship
If you decide to establish a Rights of survivorship type of account, and lets says, there are 2 people listed on account, if one of the account owners dies, then the other account owner is entitles to the decedents share of the account, and becomes 100% owner of the account.
Tenants in Common
If you decide to establish a Tenants in Common type of account, the account owners own percentages of the account and can bequest their percentage of the account to anyone including non account owners.
Community Property is when spouses are required to split their assets 50-50. There are currently 9 states where married residents are required to do this. Those 9 states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska has a law, which allows its married residents to also opt in so that their assets are also titles as Community Property.
Next, lets take a look at the characteristics of retirement accounts. The Traditional IRA retirement account for individuals, is an account that allows investors to invest and grow profits, on a tax deferred basis, meaning, without having to pay taxes each year, unless money is withdrawn from the account. In 2020, investors can contribute and deposit up to $6000 per year in I R A’s. Investors that are 50 and older, can contribute up to $6,500 per year.
The Roth is one of Pro Stock Options’s favorite types of accounts, because of its significant tax advantages. The roth is an individual retirement account that allows investors to contribute up to $6000 per year. Contributions can be withdrawn at any point in time, without having to pay the 10% early withdrawal penalty or taxes, since contributions have already been taxed.
Investors do not have to pay taxes on the profits for stocks, and securities that are sold each year within the account, like they would for individual and joint accounts.
Plus, once the investor meets 2 conditions of being at least 59 1/2 years old, and the Roth account itself has been opened for at least 5 years, at this point, money can be withdrawn from the account tax free, and like the traditional I R A, the earnings can grow on a tax deferred basis.
Now lets take a look at how to actually open the account. For this example we will use Etrades platform. Go to Etrade.com and click the open an account button. As you can see, it is an 8 step process and it takes about 15 minutes to get your account open and funded.
The 1st step is to select the account type that you would like to open. You will see a list of the more common types of accounts that investors use to buy stocks.
The 2nd step is to input your personal information within the application. This is where you input your information, such as your name, and address.
The 3rd step is identity verification. Etrade has a verification process to ensure the account owner is who they say they are.
The 4th step is to complete your investment profile. Here you input the number of years you have traded stocks, options, and bonds.
The 5th step is the account set up. The 6th step is to review your application.
7th step is where you create your ID and password. The 8th and final step is selecting how you will fund your account.
Next, you need to decide how your portfolio is will be constructed. This is known as asset allocation. Asset Allocation is the mix of investment types that will be a part of your portfolio. Such as, stocks, options, E T Fs, and preferred stocks.
You need to decide how comfortable you are with assuming risk. Risk averse investors are those who are reluctant to take risks. They lean towards the conservative model for their portfolio.
The primary goal of the most risk averse investor is to protect their principle. They tend to invest in assets such as money markets, cds, government backed t’bills and treasury notes. Etrade classifies asset mix into 3 categories. Conservative, Moderate, and Aggressive. lets take a look at the constuct of each according to ETrades models.
First, lets take a look at the construct of a conservative portfolio. 20% of the portfolio is allocated in stock. options are also a part of this category. 79% is allocated in bonds. preferred stocks are also considered to be a fixed income type of asset, so preferred stock would also be in this category. and 1% of the portfolio is in cash.
Next, lets take a look at the construct of a moderate portfolio. 60% of the portfolio is invested in stocks or options. 39% of the portfolio is invested in bonds or preferred stocks. 1% of the portfolio is left in cash. This portfolio has a very nice investment mix.
Next, lets take a look at the make up of an aggressive portfolio. 99% of the portfolio is invested in stocks, and options. 0% is invested in bonds or preferred stocks. 1% is left in cash. At pro stock options, we feel that this model is just too aggressive. About 80% of this type of portfolio, should be invested in stocks, and options. 19% in bonds and preferred stocks. And 1% in cash.
Stocks are one of the most popular ways to invest in the financial markets. The value of a stock is based off the perceived value of the corporation. Some stocks pay dividends to to the investors who own the shares.
The dividends are typically paid out on a quarterly basis, every 3 months. The chart below shows a dividend paying stock over the course of 10 years. The dollar signs are a representation of all the dividends that were paid during that time period.
ETFs may have features that are similar to a stock and it may also have features similar to a mutual fund. ETFs Can be bought and sold on exchanges similar to stocks through out the day. Mutual funds are priced only once a day.
Some ETFs help reduce unsystematic risk by offering instant diversification into a sector. This is similar to the mutual fund concept. If an investor buys one company and that company goes bankrupt then there is a very good chance that the stock goes to zero.
On the other hand, if an investor invests in many companies and one of those companies goes bankrupt, the portfolio could still maintain its value in price since there are many other companies within the portfolio to offset the company that went belly up.
Options | puts and calls
Options can be used to reduce risk within an investor’s portfolio and boost returns. At Pro Stock Options, we focus on 2 particular strategies: Selling cash secured puts and selling covered calls.
Selling Cash Secured Puts
Instead of using a typical market order or limit order to buy stock, we sell cash secured puts instead. For example, Lets say you are interested in buying ABC stock at market and it is currently trading at $20.30 cents a share. You can actually sell an option to buy that same stock a month form now and get paid a cash premium today just for your willingness to buy the stock in the future.
Option contracts all have an expiration date. This is when they stop trading in the open market, this is usually on a Friday unless the investor is trading a European style option. At that point in time, if the stock is below your price level of $20 then the following Monday you will automatically buy the stock at $20.
If the stock is above $20 come expiration you will not buy the stock. The good news is either way, you get to keep the cash premium that was paid to you just for selling the option.
Selling Covered Calls
A 2nd option strategy is selling covered calls. Instead of using market and limit order to sell your shares, you can sell call options to sell your shares and at the same time, get paid premiums just for selling the option.
Options are considered covered if the investor owns the actual stock. If the investor does not own the shares then the option is not covered and is considered to be a naked option which can potentially be very risky.
Let’s take a look at a covered call example. An investor owns 400 shares of XYZ stock that was purchased for $20 a share.
The investor now sells four $21 strike call options that are priced at $1.00 that expire 3 weeks from now. The investor has agreed to sell his shares at $21 a share at the time the options expire.
If the stock closes above $21 by a penny or more then the option is considered to be in the money and the options are exercised and the investors shares are sold. If the stock finishes below $21 then the investor keeps his shares.
Once again, the good news is no matter if the stock finishes above or below your strike price, when options are sold, investors get to keep that upfront cash premium payment that went into their cash balance.
This post is designed to give both new and experienced investors direction when it comes to investing in the stock market. Lets recap the 4 step process of effective investing.
The 1st step is deciding the type of brokerage account to open. The most common types of accounts are individual, joint, roths and traditional iras.
The 2nd step, we showed you the account opening process via Etrade’s platform.
The 3rd step we showed you 3 investment mix models, also known as asset allocation for your portfolio. We looked at conservative, moderate and aggressive models.
The fourth step we showed you strategies that can drastically increase your chance of making money in the markets. We looked at stock, ETF, and option strategies.