Stashing money in a regular savings account is no way to grow wealth. Sure, you will earn interest off your deposits, but these earnings pale in comparison to what you could earn investing in the stock market.
Playing your hand in the stock market may sound a bit risky, as there’s always the chance of losing money. The value of stocks can shift at a moment’s notice, and even the most seasoned investors lose money at times. But if you’re interested in creating wealth, not pennies, and if your stomach can handle the ride, why not give stocks a try?
Making money with the stock market is a fairly simple concept to grasp – buy shares in a company, wait for the stock to increase in value and then sell the stock for a profit. Understand, however, that profits from selling a stock is all about timing. Of course, this is the hardest game to time, as there’s no way to know how stocks will perform in the future. You can pull out when stock prices drop to avoid losing your investment, or you can sell when stocks are doing well to realize gains before the market shifts.
These, however, aren’t the only reasons for unloading your stock. Maybe you’ve reached your investment goal and want to explore safer investment options. Then again, maybe you need cash for some unexpected expense. Regardless of how and when you choose to sell stock, there is an important factor to consider – the after-tax return.
Anytime there’s talk about selling stocks, discussions about capital gains follows. Capital gains is profit that results from selling an assets, in this case, stock. Nothing in life is free, and if you earn money off any sold stock, expect the IRS to come knocking. It goes without saying that capital gains tax will cut into your profit. But like ordinary income, there are different tax brackets for capital gains – based on how long you own a particular investment.
There are basically two types of investing: short-term and long-term. Short term investing can include day trading, but it can also refer to any stock held for less than one year. While many investors recognize the value of hanging onto their stock for years, others find long-term investing boring and prefer the ongoing thrill of buying low and selling high for a quick profit. To each its own, but there is an undeniable downside to short term investing – the tax rate.
The short-term capital gains tax rate can be considerably higher than the long-term capital gains tax rate. What does this mean exactly? Simply put, the less time you hold an investment, the more you will pay in taxes. Hold an investment for less than one year and profits are taxed at ordinary income tax rates – which range from 10% to 35% for the year 2013. The capital gains tax rate on long-term investments, however, is 0%, 10% or 15%, depending on your tax bracket – a big difference.
Bottom line: Yes, profiting in the stock market is all about timing. But not just timing the performance of a company. Although a particular stock may increase in value shortly after purchase, your pocket will take a hit if you sell within the first 12 months. Hold onto your stock for at least a year and you’ll realize bigger after-tax profits.