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Buying and Selling: Trading Basics

The New York Stock Exchange Group averaged more than 5.7 million trades per day in 2017, with an average of almost 1.5 billion shares changing hands.1 Many of these trades are more complex than most investors need to consider, but it may be helpful to understand some basic terms and types of trades.

Bid and ask — The bid price is the maximum a buyer is willing to pay for a security. The ask price is the minimum a seller is willing to accept. The difference between them, called the spread, may be as low as a penny for the stock of a large well-known company, but wider for a smaller, more obscure company.

Market order — An order to buy or sell a security immediately at the best available price (though there is no price guarantee). A market order generally will execute at or near the current bid price for a sell order, or the ask price for a buy order. However, the last-traded price, typically the price you see listed on an exchange, is not necessarily the price at which a market order will be executed.

The following order types do not guarantee that the trade will be executed. They typically allow the investor to set a time limit that may range from a day to a year.

Limit order — An order to buy or sell a security at a specific price or better. For example, if an investor wants to purchase shares of XYZ stock for no more than $10 per share, the investor could submit a buy limit order for $10 and the order will execute only if the price of XYZ stock is $10 or lower. If the investor wants to sell at a price of at least $20 per share, a sell limit order for $20 would execute only at a price of $20 or higher.

Stop order (or stop-loss order) — An order to buy or sell a security once the price reaches a specified level, known as the stop price. Investors generally use a sell stop order to limit a loss or protect a profit on a stock they own.

For example, if you own shares of XYZ security that are currently trading at $50 per share, and are concerned about holding the shares in a declining market, you could set a stop-loss order at $48 per share. If the share price declines to $48, your shares would sell at the next market price, which would typically be a little below $48 if the market decline is gradual. However, if trading is interrupted or there are large changes overnight, you could end up selling at a lower price than anticipated.

Stop-limit order — An order to buy or sell a security once the price reaches the stop price, as long as the trading price is at a specified limit price or better. This helps protect against the possibility of a stop order triggering a trade at an unwanted price. To use the example above, you could set a stop price for XYZ shares at $48 per share and a limit at $47 a share. The order would execute when the share price falls to $48 but only as long as it remains above $47.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.
 
1New York Stock Exchange, 2017

Take Charge of Your Student Debt Repayment Plan

Outstanding student loan debt in the United States has tripled over the last decade, surpassing both auto and credit card debt to take second place behind housing debt as the most common type of household debt.1 Today, more than 44 million Americans collectively owe more than $1.4 trillion in student debt.2 Here are some strategies to pay it off.

Look to your employer for help

The first place to look for help is your employer. While only about 4% of employers offer student debt assistance as an employee benefit, it’s predicted that more employers will offer this benefit in the future to attract and retain talent.

Many employers are targeting a student debt assistance benefit of $100 per month.3 That doesn’t sound like much, but it adds up. For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt two and a half years faster.

Understand all your repayment options

Unfortunately, your student loans aren’t going away. But you might be able to choose a repayment option that works best for you. The repayment options available to you will depend on whether you have federal or private student loans. Generally, the federal government offers a broader array of repayment options than private lenders. The following payment options are for federal student loans. (If you have private loans, check with your lender to see which options are available.)

Standard plan: You pay a certain amount each month over a 10-year term. If your interest rate is fixed, you’ll pay a fixed amount each month; if your interest rate is variable, your monthly payment will change from year to year (but it will be the same each month for the 12 months that a certain interest rate is in effect).

Extended plan: You extend the time you have to pay the loan, typically anywhere from 15 to 30 years. Your monthly payment is lower than it would be under a standard plan, but you’ll pay more interest over the life of the loan because the repayment period is longer.

Example: You have $31,000 in student loans with a 6% fixed interest rate. Under a standard plan, your monthly payment would be $344, and your total payment over the term of the loan would be $41,300, of which $10,300 (25%) is interest. Under an extended plan, if the term were increased to 20 years, your monthly payment would be $222, but your total payment over the term of the loan would be $53,302, of which $22,302 (42%) is interest.

Graduated plan: Payments start out low in the early years of the loan, then increase in the later years of the loan. With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans the initial lower payment includes interest only.

Income-driven repayment plan: Your monthly payment is based on your income and family size. The federal government offers four income-driven repayment plans for federal student loans only:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

You aren’t automatically eligible for these plans; you need to fill out an application (and reapply each year). Depending on the plan, your monthly payment is set between 10% and 20% of your discretionary income, and any remaining loan balance is forgiven at the end of the repayment period (generally 20 or 25 years depending on the plan, but 10 years for borrowers in the Public Service Loan Forgiveness Program). For more information on the nuances of these plans or to apply for an income-driven plan, visit the federal student aid website at studentaid.ed.gov.

Can you refinance?

Yes, but only with a new private loan. (There is a federal consolidation loan, but that is different.) The main reason for trying to refinance your federal and/or private student loans into a new private loan is to obtain a lower interest rate. You’ll need to shop around to see what’s available.

Caution: If you refinance, your old loans will go away and you will be bound by the terms and conditions of your new private loan. If you had federal student loans, this means you will lose any income-driven repayment options.

Watch out for repayment scams

Beware of scammers contacting you to say that a special federal loan assistance program can permanently reduce your monthly payments and is available for an initial fee or ongoing monthly payments. There is no fee to apply for any federal repayment plan.
 
1New York Federal Reserve, Quarterly Report on Household Debt and Credit, February 2018
2 CFPB, Innovation Highlights: Emerging Student Loan Repayment Assistance Programs, August 2017
3Society for Human Resource Management, October 2, 2017

Infographic: Working in Retirement

Should I enroll in a health savings account?

A health savings account (HSA) is a tax-advantaged account that you can establish and contribute to if you are enrolled in a high-deductible health plan (HDHP). Because you shoulder a greater portion of your health-care costs, you’ll usually pay a much lower premium for an HDHP than you would pay for traditional health insurance. This allows you to contribute the premium dollars you’re saving to your HSA. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds. An HSA can be a powerful savings tool, especially if your health expenses are relatively low, since you may be able to build up a significant balance in your HSA over time. Before you enroll in an HSA, ask yourself the following questions:

What will your annual out-of-pocket costs be under the HDHP you’re considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.

How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building a cushion against future expenses. For 2018, you can contribute up to $3,450 for individual coverage and $6,900 for family coverage.

Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you’re assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.

Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of pocket.

How does the coverage provided by the HDHP compare with your current health plan? Don’t sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.

What tax savings might you expect? HSA funds can be withdrawn free of federal income tax and penalties provided the money is spent on qualified health-care expenses. Depending on the state, HSA contributions and earnings may or may not be subject to state taxes. Consult your tax adviser for more information.

What are the new rules for 401(k) hardship withdrawals?

The Bipartisan Budget Act passed in early 2018 relaxed some of the rules governing hardship withdrawals from 401(k)s and similar plans. Not all plans offer hardship withdrawals, but the ones that do will be required to comply for plan years beginning in 2019.

In order to take a hardship withdrawal from a 401(k) or similar plan, a plan participant must demonstrate an “immediate and heavy financial need,” as defined by the IRS. (For details, visit the IRS website and search for Retirement Topics – Hardship Distributions.) The amount of the withdrawal cannot exceed the amount necessary to satisfy the need, including any taxes due.1

Current (pre-2019) rules

To determine if a hardship withdrawal is qualified, an employer may rely on an employee’s written statement that the need cannot be met using other financial resources (e.g., insurance, liquidation of other assets, commercial loans). In many cases, an employee may also be required to take a plan loan first.

Withdrawal proceeds can generally come only from the participant’s own elective deferrals, as well as nonelective (i.e., profit-sharing) contributions, regular matching contributions, and possibly certain pre-1989 amounts.

Finally, individuals who take a hardship withdrawal are prohibited from making contributions to the plan — and therefore receiving any related matching contributions — for six months.

New rules

For plan years beginning after December 31, 2018, the following changes will take effect:

1. Participants will no longer be required to exhaust plan loan options first.

2. Withdrawal amounts can also come from earnings on participant deferrals, as well as qualified nonelective and matching contributions and earnings.

3. Participants will no longer be barred from contributing to the plan for six months.
 
1Hardship withdrawals are subject to regular income tax and a possible 10% early-distribution penalty tax.

 

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018