Investing can help investors pursue financial goals, such as buying a home or funding retirement. By investing, you're putting your money to work, and at risk, to pursue your goals. Let's see how it works.
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Investing basics

# Investing basics: FAQs

If you're new to investing, you probably have a lot of questions like:

## What's the difference between saving and investing?

Saving is putting money aside for future use. It's important to save so you can cover fixed expenses, such as mortgage or rent payments, and to make sure you're prepared for emergencies. Generally, people put their savings in bank accounts, where up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC).

Investing is when you put your money "to work for you," another way to think of investing is when you put your money "at risk." You buy an investment like a stock or bond with the hope that its value will increase over time. Although investing comes with the risk of losing money, should a stock or bond decrease in value, it also has the potential for greater returns than you'd receive by putting your money in a bank account.

## The goal of investing is to grow your money over time

In this example from 2004 to 2023, Diego put $3,000 each year in a bank account to fund his short-term spending needs. The interest he received on his money averaged 1% over 20 years, which was relatively low. But the trade-off was that it was safe and accessible. Diego had $68,909 after 20 years.

Over that same period, Alexis was planning for her retirement, so she invested $3,000 each year in a moderate portfolio, which returned an average of above 6% over 20 years. Alexis had $128,644 after 20 years.

How To Invest Alexis and Diego

Read Important Disclosures

Source: Schwab Center for Financial Research. The moderate model portfolio (allocated 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% fixed income, and 5% cash investments) may not be suitable for all investors. Returns assume reinvestment of dividends and interest. Fees and expenses would lower returns. This chart represents a hypothetical investment and is for illustrative purposes only. The actual rate of return will fluctuate with market conditions. Past performance is no guarantee of future results.

This opportunity to earn more money comes with additional risks—including the loss of some or all your investment. Different types of investments have different levels of risk, so it's important to understand your

risk tolerance TooltipRisk tolerance is an investor's willingness to take on risk with his or her investments

—or your appetite for risk. If working toward a long-term goal, people often consider investing as opposed to saving. Recently, savings rates haven't kept up with the rate of inflation. This means that if you put all your cash in savings, the actual purchasing power of your money could shrink over time.

## Inflation can severely erode your purchasing power over time

This chart shows the impact of inflation on the purchasing power of a fixed, annual $50,000 pension. It's important to understand the effects of inflation because it decreases the amount of goods or services you can buy (purchasing power), all else being equal. Here we see that with a hypothetical 3% inflation rate, the fixed, annual $50,000 pension can purchase only $37,200 worth of goods or services at the end of 10 years (a 26% loss of purchasing power) and only $27,684 worth of goods or services at the end of 20 years (a 45% loss of purchasing power).

How To Invest Inflation

Read Important Disclosures

Source: Schwab Center for Financial Research. The "nominal" amount is the stated value. The "real" amount is the value adjusted for the effects of inflation. Inflation is represented by the change in the Consumer Price Index for AII Urban Consumers (CPI-U). From 2004 to 2023, inflation averaged 2.6%. But during some periods in the past, the average was much higher: It averaged 6.2% from 1970-1989. Past performance is no indication of future results.

## Why should I invest?

Investing can help investors pursue financial goals, such as buying a home or funding retirement. By investing, you're putting your money to work, and at risk, to pursue your goals. Let's see how it works.

## The power of compounding: A little goes a long way

Alexis invests $3,000 a year for 40 years and receives an average annual return of 6%. At the end of 40 years, her portfolio is worth $492,143. This amount consists of $372,143 in total earnings plus her principal investment of $120,000. How did her portfolio grow so much? It's because every year Alexis's 6% return is on the new larger balance (made up of her initial investment, her subsequent yearly investments, and the money she's earned from dividends/interest and capital appreciation on the investment). That's the power of "compound returns." Of course, in real investing, a 6% average return in an investment portfolio commonly includes high return years, low return years, and even some negative return years.

How To Invest Power of Compounding

Read Important Disclosures

Source: Schwab Center for Financial Research. The chart above is hypothetical and for illustrative purposes only. Earnings assume a 6% annual rate of return, including the reinvestment of dividends and capital appreciation, and do not reflect the effect of fees or taxes, which would reduce the overall amount.

## When should I invest?

Many investment professionals say the sooner you invest, the better. Historically, the longer you invest, the less impact the market's short-term ups and downs have on your return.

Some investors may sit on the sidelines waiting for the "right" time to invest. Unfortunately, timing the market is virtually impossible. Instead, many investors consider just getting started and remember this old investing adage: Time in the market is more important than timing the market.

## Early beats often

Let's look at an example. Say Alma invests $10,000 when she's 31 and lets the money grow for 20 years. Another investor, Dave, invests $2,000 a year on the same day each year, starting at age 41, for only 10 years. By the time they both reach age 50, Alma has nearly 15% more than Dave even though she invested half as much. Alma has an ending balance of $32,071 compared to Dave's balance of $27,943.

How To Invest Early Beats Often

Read Important Disclosures

Source: Schwab Center for Financial Research. The chart above is hypothetical and for illustrative purposes only. Returns assume reinvestment of dividends and capital appreciation. Fees and expenses would lower returns. Earnings assume a 6% annual rate of return and do not reflect the effect of fees or taxes, which would reduce the overall amount.

## How much should I invest?

It depends on how much you have as well as your goals and timeline (also called your time horizon). But investors commonly choose to invest the maximum they can comfortably afford after setting aside an emergency fund, paying off high-cost debt, funding daily living expenses, and saving for any short-term goals. Compared to waiting to make a lump-sum investment, by investing on a regular basis, investors may potentially experience greater returns over time through

compounding TooltipCompounding is the increasing value of an investment due to the return earned on both the initial investment and subsequent returns.

.

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## Is investing risky?

Investing has risks. The goal is to manage them. Many investors choose to do this by having a plan, which should include a deadline for when the money is needed, and diversifying their portfolio.

Diversification spreads assets across different types of investments, so you're not putting all your eggs in one basket. Investors tend to divide funds among stocks, bonds, and cash equivalent investments based on risk tolerance and timeline. Dividing further, investors often diversify their stock portion into different types, such as

large cap Tooltiplarge cap refers to a company with a market capitalization of more than $10 billion. Market capitalization is calculated by multiplying the stock price by the number of shares outstanding.

,

small cap Tooltipsmall cap refers to a company with a market capitalization of less than $2 billion. Market capitalization is calculated by multiplying the stock price by the number of shares outstanding.

, and international. And then within those divisions, investors can also break it even further down by adding stocks that represent different sectors like technology and health care. The ultimate goal is to own investments that don't historically move in tandem.

## Investment types perform differently

Because investment types—like stocks, bonds, or cash equivalent investments—tend to perform differently over time, it's important to diversify your portfolio. For example, looking at this chart, see how the performance of stocks, bonds, and cash equivalent investments in a moderate risk portfolio varied over a 20-year time horizon.

How To Invest Investment Types

Read Important Disclosures

The indexes used are S&P 500® index (large-cap equity), Russell 2000® Index (small-cap equity), MSCI EAFE Net of Taxes (international equity), Bloomberg Barclays U.S. Aggregate Bond Index (fixed income), and Citigroup 3-Month U.S. T-Bills (cash equivalents). The Moderate Allocation is 35% large-cap equity, 10% small-cap equity, 15% international equity, 35% fixed income, and 5% cash, using the indexes noted. Past performance is no guarantee of future results. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Dividends and interest are assumed to have been reinvested, and the example does not reflect the effects of taxes or fees. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly.

## What are some common types of investments?

## Stocks

### Stocks (equities) represent ownership in a company.

As a shareholder, investors can achieve returns in two main ways:

1.  The price of the stock may increase, allowing an investor to sell at a profit.

2.  The company may distribute some of its earnings to stockholders in the form of dividends.

Stocks are considered relatively risky because the stock price may also decrease and there is no guarantee you'll be paid dividends.

- Dollar sign in a circle

### How do I choose a stock?

There are many ways to pick stocks. Longer-term investors may use

fundamental analysis TooltipFundamental analysis is a research methodology that focuses on a company's management structure, competitors, industry position, growth rate, growth potential, income, and revenues so you can decide if it's a good value.

to research stocks.

Shorter-term traders may rely on

technical analysis TooltipTechnical analysis is a research methodology that focuses on patterns within stock charts as a way to try to forecast future pricing and volume trends.

, which examines price charts for insights into future market activity.

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### How do I buy a stock?

If you know which stock you want to buy, look up its ticker symbol. Then log in to your brokerage account and place a trade order. You can do this with a:

- Market order TooltipMarket order is an order to buy or sell a security at the best available price. Keep in mind that a market order guarantees execution, but the exact price is not known in advance.

if you want your order to fill almost immediately during market hours.

- Limit order TooltipLimit order is an order to buy or sell a security at a specified price or better. It guarantees a price that is at least as good as your limit, but there's a chance the order will not get filled.

if you have a maximum dollar amount you want to spend and no more.

- Stop order TooltipStop orders are often used to try to manage losses, and meant to sell a stock once it falls to or through a certain price. Buy stop orders are less common than sell stop orders, but are used to buy a stock once the stock goes up though the stop price. Stop orders are triggered when a price drops through a sell stop order or a price goes up though a buy stop order. Once triggered a stop order becomes a market order. Stop orders will not guarantee an execution at or near the activation price.  Once activated, they compete with other incoming market orders.

if you want to buy or sell once the stock moves through a certain price.*

The stock will show up in your account once the order executes.

*There is no guarantee that execution of a stop order will be at or near the stop price.

## Bonds

### A bond represents a loan you make to the government, municipality, or corporation (issuer).

In return, that issuer promises to pay you a specified rate of interest and to repay the face value after a certain period of time, barring default.

Bonds can provide a predictable income stream because they generally pay bondholders interest twice a year. They're also useful for preserving capital because they promise to repay the original loan amount upon maturity. As with any investment, bonds have risks, such as default risk and reinvestment risk. Bonds tend to be less volatile than stocks, but an issuer potentially could default on its loan or (in the case of a callable bond) call the loan (this is when an issuer returns the principle and stops interest payments before the bond matures).

- Dollar sign in a circle

### How do I choose a bond?

The bond market is much bigger and more complex than the stock market.

Individual investors and investors just starting out may consider bond funds because they offer diversification and professional management.

If you prefer individual bonds, you can start by looking at the issuer's credit quality. Higher-quality bonds tend to offer lower yields with less risk. Lower-quality bonds are riskier—including the risk of

default Tooltipdefault is failure to repay a loan.

—but can offer higher yields. You also want to consider the

maturity date Tooltipmaturity date is the date when a bond issuer must repay the principal or the original investment to the bondholder.

, when your original investment will be repaid, and the

coupon Tooltipcoupon is the annual interest rate a bond issuer promises to pay the bondholder each year

, the annual interest rate paid on the bond.

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### How do I buy a bond?

You can buy bonds or bond funds through a broker dealer.

Find out more about:

## Exchange-traded funds (ETFs)

### An exchange-traded fund (ETF) is an investment fund that generally holds a portfolio of one specific asset class like stocks, bonds, or commodities. Unlike mutual funds, ETFs are bought and sold and quoted like stocks, and some investors find that aspect convenient compared to mutual funds.

Most ETFs are considered passive investments because they are based on an index. Index-based ETFs are similar to those mutual funds known as "index funds," meaning they track market indexes to replicate the performance of a certain part of the market. For example, an ETF that tracks the S&P 500® index (SPX) is trying to mirror the performance of companies in the S&P 500. ETFs trade like stocks on an exchange, and their price changes throughout the day as shares are bought and sold.

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### How do I choose an ETF?

Look for ETFs that represent the part of the market you're looking to invest in.

Then look at the costs. There are three different types to consider: the

operating expense Tooltipoperating expenses cover the management and marketing of investment products, such as mutual funds and ETFs. They can include management fees, 12b-1 fees (paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses), and other expenses.

,

bid/ask spread Tooltipbid/ask spread is the difference between the highest price a buyer is willing to pay for an investment and the lowest price a seller is willing to accept to sell it.

, and trading

commissions Tooltipcommissions can come in several forms. The most common ones are fees for trades placed to buy and sell investments in your portfolio. Over time, these fees can add up to a substantial amount, especially if you place frequent trades on your own or through an investment professional.

.

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### How do I buy an ETF?

You can buy and sell ETFs through a brokerage account. Just enter the ticker symbol of the ETF you'd like to buy and place your trade.

Find out more about ETFs.

## Mutual funds

### A mutual fund pools money from many investors and then invests that pool in a broad range of investments, such as stocks, bonds, and other securities, to create a portfolio; however, like many ETFs, passively managed mutual funds—also known as index mutual funds—are portfolios that try to replicate a particular index.

A mutual fund is often managed by a fund manager. When you buy a mutual fund, you buy a stake in everything the fund invests in and any income those investments generate. Mutual funds make it easy to build a diversified portfolio and get professional management, so you don't have to research, buy, and track every security in the fund on your own.

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### How do I choose a mutual fund?

Some investors consider passively managed index funds. These funds simply aim to track their benchmark market index before fees and expenses.

If you seek to outperform the market, consider actively managed funds. It's important to understand the fund's investment objective and strategy before investing because there are no guarantees the fund will actually outperform. It’s also possible the fund will underperform its benchmark. Also keep in mind that actively managed funds tend to have higher expenses.

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### How do I buy a mutual fund?

You can buy these funds either directly from the fund company or through a broker-dealer. Just look up the ticker symbol of the fund you'd like to buy and place an order. Note: Mutual fund trades are executed once a day after market close.

## Learn more about different investment types.

## How can I invest without paying a lot of fees?

Every dollar you pay in fees is one that can't generate compounding returns. That said, investing generally costs money. So, what can you do?

- Look for brokers that charge low trading

commissions Tooltipcommissions can come in several forms. The most common ones are fees for trades placed to buy and sell investments in your portfolio. Over time, these fees can add up to a substantial amount, especially if you place frequent trades on your own or through an investment professional.

.

- Consider funds with low

operating expenses Tooltipoperating expenses cover the management and marketing of investment products, such as mutual funds and ETFs. They can include management fees, 12b-1 fees (paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses), and other expenses.

.

- Look for

no-sales load Tooltipno-sales load is paid to a financial institution for buying or selling securities (typically mutual funds) on your behalf

, no transaction fee mutual funds that allow you to buy and sell shares without paying these common fees.

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Investors in mutual funds and ETFs should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can obtain a prospectus by visiting schwabassetmanagement.com/prospectus. Please read it carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification, asset allocation, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risks, including loss of principal.

Past performance is no guarantee of future results.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

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