10 Answers to Common Investing Questions (2024)

Saving and investing work hand in hand in building long-term wealth and financial security. Saving money is spending less than you earn and setting that money aside for the future—whether that's for an emergency or for a specific goal like a vacation or a new home. Most savings are held in conservative accounts that are relatively safe and easily accessible but have minimal growth potential. That's appropriate for short-term goals, but your money is likely to lose value over time when taking inflation into account.

When you invest, on the other hand, you're using money to try and make more money. If your investments grow in value, that growth can compound. Compounding (or compound growth) is what happens when you reinvest your earnings—and keep them invested—to generate more earnings. Over time, this can lead to significant gains. Time is an essential ingredient, helping to smooth out market volatility. That's why when you have a long-term goal like a child's education or retirement, investing can be especially important.

A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. When the value of the business rises or falls, so does the value of the stock. Returns are achieved either by selling the stock at a profit for a higher price or through receiving dividends (though neither of these outcomes are guaranteed).

Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

Investors buy and sell stocks for a number of reasons, including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Keep in mind the price of a stock can fall as easily as it can rise.

The purchase price of stock is dependent on demand: When there are more buyers than sellers, the price of the stock rises. When there are more sellers than buyers, the price of the stock drops.

Once you've selected an asset allocation in line with your risk tolerance and invested accordingly, you can take a long-term approach. That doesn't mean you can ignore your investments, however. You'll want to monitor your asset allocation and possibly rebalance annually (or more frequently) if markets are making big moves. Rebalancing is designed to keep your portfolio's target allocation across different asset classes, and intended level of risk, consistent over time.

Rebalancing means looking at the percentage of stocks, bonds, cash, and other investments in your portfolio to make sure the relative weights of each align with your target asset allocation. If any weights are meaningfully different, it may be necessary to buy or sell positions to align your portfolio with your target. By selling positions that have become overweight in relation to the rest of your portfolio and moving the proceeds to positions that have become underweight, you can return your portfolio back to its original target allocation. Rebalancing your portfolio is an important step in controlling risk. Note: Rebalancing may result in taxes.

Market timing (trying to buy stocks at market lows and sell at market highs) is nearly impossible, even for professional investors. There's a saying to keep in mind: Time in the market is more important than timing the market.

Instead of trying to time the market, focus on getting invested and staying invested—and even making it a habit via regular contributions.

There's a term for this, actually: dollar-cost averaging. Dollar-cost averaging refers to the practice of investing a set amount of money at regular intervals (biweekly, monthly, etc.), regardless of stock market performance. Dollar-cost averaging establishes good investing habits and is a prudent strategy to consider, especially for new investors.

When you invest in a mix of different types of investments, you are diversifying. Diversification means lowering your risk by spreading money across and within different asset classes, like stocks, bonds, and cash. By diversifying your portfolio, you can better weather market ups and downs while maintaining your investment's potential for growth.

According to the Schwab Center for Financial Research, you should be concerned if a single stock accounts for 10% to 20% or more of your total stock investments. Generally speaking, the wider the number of holdings, the greater the diversification benefits. If you only hold two or three stocks in your portfolio, it won't be enough to reap the benefits of diversification.

If you're only invested in your company stock, you're not diversified and are putting your funds at risk. As stated above, the stock of a single company (even your employer) should account for no more than 10% to 20% of your total portfolio. Additionally, holding stock in the company you work for is uniquely risky as the stock may likely be down in price at a time when your job itself may be most at risk.

Equity compensation, in any form, is a potential way to participate in your employer's success. But like any other security, it must be carefully managed to align with your long-term goals and financial plan.