How to Invest in the Right Stocks

Pick stocks for retirement first. Since this is a long-term investment, you can afford to pick more aggressive stocks. Try to do this as part of an employer-sponsored 401k plan. You designate an amount of money to take out of every paycheck. This is usually up to 15 percent of your gross income, but is subject to limits. The money is removed before taxes are paid and deposited in an account that grows tax-deferred. Many employers also contribute free money to 401k accounts as a bonus. You decide how your 401k money is invested. Pick aggressive-growth stocks or a date-targeted fund that automatically redistributes assets to more conservative investments as you approach retirement age.

Create a tax-sheltered retirement account of your own if your employer does not offer a 401k. The best way to do this is with an Individual Retirement Account. IRAs come in two varieties: Roth IRAs and Traditional IRAs. Roth IRAs offer no tax breaks on contributions, but grow tax-free and are tax-free when distributions are taken in retirement. Traditional IRAs offer a tax deduction for qualified contributions, but taxes must be paid when you withdraw earnings in retirement. There are limits, so check with the IRS every year. As with a 401k, you decide how to invest IRA money. Choose a date-targeted fund that is heavy in aggressive-growth stocks.

Invest in stocks for a child's college education with a 529 plan. Each state offers one. You don't have to live there to participate, so you can shop around for the best deal. These 529 investments are tax-free as long as the money is spent on education. There are deposit limits, so check the specific 529 plan for details. The stocks you pick for a 529 plan depend on how much time there is before the child goes to college. If it is more than 10 years, pick aggressive-growth funds. As the child gets closer to college age, shift investments to more conservative dividend-paying stocks and bonds. By the time the child reaches college age, the 529 should be primarily conservative investments.

Choose stocks that are paying high dividends if the economy is bad or if you will need the money soon. Most high-dividend-paying stocks are more conservative. That means their share price fluctuates less and they pay out more to stockholders periodically. Focusing on dividends allows you to collect income even while share prices are falling. The only drawback to this is that taxes must be paid on dividend income every year.

Take advantage of a good economy by mimicking an index fund. Index funds reflect the market as a whole. When the market is up, the index fund is up. When there is a bull market, you can either buy shares in an index fund or purchase individual stocks that are owned by them. These will be big-name companies like Microsoft, Citibank and IBM. When the economy is booming, companies like these tend to do very well. Be careful, though: When the economy takes a turn for the worse, their stock prices can be among the first to fall.