Grow Your Money By Investing in Stock, Bonds, & CDs

Starting to invest can feel overwhelming, especially if you’re new to it. With so many options, terms, and strategies, it’s easy to feel unsure about where to begin. But the good news is, you’re not alone, and it’s fairly easy to get started, especially with a good foundation for how it all works.

Investing is one of the best ways to passively grow your wealth. In this blog, we’ll demystify the basics of investing and the various ways you can make your money grow.

Investing in stocks

When you buy stocks, you’re buying an ownership stake in the underlying company. For example, if you own a share of Apple stock, it means you are an owner of Apple Incorporated. A very small owner, but an owner nonetheless.

The key to investing in stocks is time. Stocks are traded all day, and prices can vary greatly from minute to minute. That volatility can feel quite risky to some investors, but one way to lower volatility is to invest in several different companies–especially those in different industries. This is known as diversifying your investments.

Diversify your stock investments

One of the easiest ways to buy stock in a variety of different companies is to invest in index funds.

Index funds are a type of mutual fund. A mutual fund is a managed investment fund. Investors give the mutual fund their money, and the fund invests it on their behalf. Index funds are low-cost because the management is easy–just follow an index.

Index funds give you diversification without the added cost. Instead of buying shares of 500 individual companies, you can just invest in an index fund that matches the S&P 500 index. You can often do this at a fairly affordable cost, as index funds have some of the lowest expense ratios.

Other types of mutual funds exist to invest in specific categories or goals, such as investing in gold or real estate. Those funds are often more expensive because they require more people and expertise.

If you have the patience and fortitude to wait, investing in stocks can yield some of the biggest annual returns compared to other assets.

How do you report stock investments for taxes?

When it’s time to file your taxes, you’ll report capital gains or losses from your sale of stock on your tax return. Depending on how long you hold the stock before selling, it will determine if it’s a short-term or a long-term capital rate. 

Short-term capital gains are gains on investments you’ve held for one year or less. Long-term capital gains are gains on investments you’ve held for longer than one year.

The capital gains tax calculator can also help you with your tax planning to find out if you have a capital gain or loss and compare your tax outcome of a short-term vs. long-term capital gain–whether you already sold or you’re considering selling your stock.

Investing in bonds

A bond is essentially a loan. When you buy a bond, whether it’s from an individual company, a municipality, or the United States Treasury, you’re lending money to that entity.

Each bond has a face value, a term, and a coupon. The face value is the amount you get back after the term expires. The coupon is an interest payment you receive while you hold the bond.

A 30-year treasury bond issued by the United States Treasury has a term of 30 years, an interest rate set at auction, and pays out that interest every six months. At maturity, you get paid the face value of the bond.

You can buy and sell bonds on the secondary market, much like stocks, and how much you pay for the bond is set by supply and demand. If you buy a bond and hold it until maturity, you know how much you’ll make on your investment as long as the entity avoids defaulting on the bond. 

What risks are associated with investing in bonds?

Understanding the risks associated with investing in bonds can help you make informed decisions as a first-time investor.

Something you’ll want to keep in mind is that bonds have an inverse relationship. As interest rates fall, investors buy bonds with the highest interest rates to lock in better rates. This results in rising bond prices. When interest rates rise, investors sell bonds with lower interest rates, which results in falling prices.

If the cost of living or inflation increases dramatically after you buy bonds, you’re locked into a fixed return. That return might not be as valuable when you factor in inflation, and you could even end up losing money on your investment.

When a bond is called before maturity, you’ll receive cash for the bond. Unfortunately, investors often have trouble reinvesting that cash at the same rate, which can have a negative impact on your returns.

Unlike government bonds, corporate bonds aren’t guaranteed by the U.S. government if a bond issuer can’t repay a debt, which could result in default.

Corporate bonds can also be riskier investments because they’re harder to sell. You may not be able to find a buyer quickly, which can affect your return and can result in unstable bond prices.

A company may also have its interest rates increase as a result of a poor credit rating. When that happens, it becomes harder for the company to repay its debts, which negatively impacts your corporate bonds.

How do taxes work for bonds

The type of bond you buy will determine your tax situation.  

Generally, the interest you earn on Treasury bills, notes, and bonds is subject to federal income tax but not state or local income tax. Also, interest that your savings bonds earn is subject to any federal estate, gift, and excise taxes and any state estate or inheritance tax.

If you use savings bonds to pay for higher education, you may be able to keep from paying federal income tax on your savings bond interest, but there are some rules that apply. 

Interest from municipal bonds is tax-free at the federal, state, and local levels as long as investors reside in the same place or municipality as the issuer. That said, if the municipal bond is purchased in the secondary market and later sold, it may be taxed.

 If there are short-term capital gains, they will be taxed at ordinary income rates. Long-term capital gains are taxed at preferential tax rates that may vary according to income.

Investing in certificates of deposit

A certificate of deposit is a type of deposit account you open with a bank. A CD will have a term and an interest rate. Normally, the longer the term, the higher the interest rate. As long as you don’t close the CD, you’ll get paid that interest rate until the CD matures.

What is the risk level of investing in CDs?

A CD is considered especially low-risk because it’s backed by the bank itself. In the extreme case that the bank collapses, the FDIC should step in and reimburse you for up to $250,000.

If you need access to your funds and want to close the CD, you’ll have to pay an early withdrawal penalty. This penalty is often calculated in days of interest, depending on the bank’s fee structure and the term of your CD.

How are CDs taxed?

Generally speaking, the interest you earn on a CD is taxed at the same rate as the rest of your income. Even if you decide to reinvest the money, you have to pay taxes on the interest you earn from a CD.

Interest earned from CDs with terms longer than one year is also taxed at the regular income tax rate. You have to report and pay taxes on earned CD interest every year you hold it, even if you can’t cash it out yet.

If you cash out a CD early and face an early withdrawal penalty, you can deduct those penalties from the amount of interest you’ll have to report as income.

Which type of investments are right for you?

It’s understandable that how you invest your hard-earned money is a decision you want to weigh carefully. While there’s no sure way to completely avoid bad investments, you can take informed risks. Whether you’re investing in stocks and bonds or considering. CDs, there are a handful of factors to consider.

All types of investments come with unique risks. Analyzing historical performance is one way to decide how to invest. You can look at the historical returns on stocks vs. bonds to get a better understanding of the return you can expect on your investment.

Diversifying is also a key part of succeeding as an investor. A diverse portfolio helps you minimize the impact on your overall portfolio when one investment is performing poorly. When it comes to investing, the general rule of thumb is that you don’t want to put all your eggs in one basket.

These are just three simple ways for you to grow your money. The world of investing is much bigger than stocks, bonds, and CDs, but this is a good place to start. As you evolve as an investor, you can expand your portfolio and try new opportunities to see if they work for you.

How to minimize taxes when investing

Minimizing investment taxes is a key part of maximizing investments. These are just a few strategies you can implement to minimize taxes as an investor:

• Use tax-deferred retirement plans to postpone taxes on investments until you retire and have a lower income and, in turn, a lower income tax rate.
• Hold onto stocks for at least one year before selling them to avoid short-term capital gains tax.
• Leave investments in your retirement accounts for as long as possible to allow them to compound interest and continue to grow.

Additionally, working with a tax expert is one of the best ways to minimize taxes and keep more money in your pocket–or available for future investments.