How to Buy Stocks in a 401(k)

Research Investments Carefully Before Investing

Buying stocks in a 401k account is similar to buying stocks in a regular brokerage account. Attention must be paid to different types of investment risk, diversification and stop losses. Because the income is tax deferred, it is recommended that a portion of assets be employed in bonds and stocks with above-average market dividends or a history of steady dividend increases.

Instructions

1. Check to ascertain whether your 401k allows individual investing. Most company plans only allow trading in certain mutual fund choices. If you had a 401k plan at a previous employer, you can transfer the account to a self-directed plan that you can manage yourself. All brokerage firms have the ability to open such accounts. You will need to allow up to 30 days for the transfer. Open the account online, and create a beneficiary designation with proof of identification.

2. Develop a plan for investing that involves diversification, risk management, security selection and buy and sell points. Since profits and income are tax-deferred, emphasize the use of dividends in stocks and bond purchases. Use a significant portion of the account for short and intermediate bonds and stocks with histories of dividend increases.

3. 

   Use a diversified mutual fund if your 401k is not large enough to buy at least 15, and preferably 30, stocks. This implies that no more than about 5 percent of assets should be invested in any one stock. These monies are for your long-term retirement and thus should be invested with a bias, at the least, of not losing money. It is cheaper and more efficient if you employ a discount or online broker to save on trading fees.

4. Learn to use options to generate additional income for your account or to hedge one's portfolio in uncertain times. Covered call writing is a conservative strategy that allows the investor to generate additional income in his/her current portfolio by selling another investor the right, but not responsibility, to purchase stock in the future at today's price. Typically, such trading adds 5 perent or more each year to one's tax-deferred portfolio value.

5. Trade with stops. Stops are mandatory price points used by investors that designate the maximum loss they will observe on a trade. Stops keep small losses from becoming large losses if they are respected. There are two kinds of stops. One is the loss taken at the time a trade is made. The stop loss should not be larger than 8-10 percent of the value of the investment. The exit stop is the price decline allowed in a profitable position before it can be sold. Normally, a decline resulting in a loss of profits of about 20 percent is reasonable.

Tips & Warnings

• Another exit stop is to sell a stock when its price drops below the lowest price of the last 20 days.

• Practice trading or :paper trading" before investing real money. Get comfortable with a trading plan before investing real money.

References

• How to Diversify Retirement Acounts

Resources

• Rolling Over a Retirement Account