Thursday, October 27, 2011

Stock Market Investing for Beginners

Disclaimer: I receive a referral commission for the following link(s):  E*trade and OptionsHouse

Here are some tips I use when investing:

1) Don't invest money you need in the short term (1-2 years).

  • My feeling is that if you are trying to make money in stocks short term you are most gambling or a professional and then you probably aren't looking to me for tips.  I read a lot about stocks, but I still have no clue what will or won't go up short term.

This is a quote from Warren Buffet in an article in the NY Times during the 2008 Financial crisis

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over

2) Get a broker with low commission fees.  

  • When you are a small time investor, commissions make a big difference.  
    • A $500 investment with a commission fee of $9.99 a trade means that after buying and selling the stock you have already paid $20, which is 4% of your initial investment.  You would need the stock to go up 4% before you break even.  If you invested $1,000 in the same stock, your commissions would only be 2% of the initial investment, etc.  As you invest more money in each stock commissions are less important.
  • Let's take the same scenario if you got a more discounted brokerage firm like Their rate is $4.75 per trade.  Instead of paying $20 for buying and selling, you are paying $8, which is 1.6% of a $500 investment.  This will make a big difference if you plan on doing a lot of trading.  You also get 100 free trades to start off! 
  • If you like ETFs, there are brokerages that have commission free ETFs  Examples are Charles Schwab and Fidelity.
  • If you have a whole bunch of money that you don't mind sitting around in a low interest savings account ($25,000 or more), you should use Merrill Lynch.  They will give you 30 free trades a month if you have $25,000 in a Bank of America non-investment account or a $25,000 cash balance (not invested) in your Merrill Lynch account

3) Diversify or buy Diversified Stocks/Funds/ETFs 

  • ETFs (exchange traded funded) are funds that invest in a category of stocks (ie - kol is coal mining stocks, uyg is finance stocks) or entire indexes (ie IVV follows the S&P 500).  Some ETFs can be very risky. 
    • For example, the proshares ultra category tries to achieve returns that are double whatever the category they invest in

  • Mutual Funds - mutual funds are like ETFs but they have some different rules:
    • For an ETF, you decide what price you will buy and sell at (as long as someone is willing to sell and buy).  For a mutual fund, you can only buy or sell at the end of the day.  For example, if you want to buy a mutual fund and you put in a buy order on monday afternoon before the end of the trading day (4pm), you will buy the mutual fund at the price it closes at the end of trading on Tuesday.  You do not get to choose your price.
    • Mutual funds also usually have minimum investments that can go as high as $5,000 or more, although many are $2,500 or even $1,000.  They also will often impose a penalty if you sell before 60 days.
    • The nice advantage to Mutual Funds is that you can invest with a specific fund manager who is a good history and you don't have to think about what stocks to invest in, that's what you are paying the manager for.
    • Mutual funds work out deals with different brokerage firms.  The same mutual fund might have a $50 commission in one brokerage firm, 2% of the transaction in another, be free in a third and not be available through a fourth.  
      • Once you figure out the mutual fund you want, look it up in Yahoo Finance.  They do a very good job of telling you where the mutual fund is available for buying.  Here is what you would find under the Mutual Fund ticker HIINX.  You want to look for where it says no load and no transaction fee and that will give you best deal on that mutual fund.

4) Don't pay attention to what you paid for the stock

  • If your stock goes up it doesn't mean it is time to sell.  It could be that it was a good buy at $35 a share but not so good at $45 a share or it may still be a good buy until $75 a share.  It is the same if the stock goes down.  Don't be afraid to sell at a loss if you think it will go down further.

5) Don't try to time the market 

  • It's just about impossible to know when to buy or sell an individual stock.  When you have decided to buy a stock, I recommend buying on a schedule.  For example, buy a few shares every couple months.  This way you won't get burned by buying when the stock was too high.

6) Google/Yahoo Finance -

  • I like to use Google finance.  You put in all of your transactions from any accounts and they will calculate your all time gains and losses.  They also have realtime streaming prices.  On many websites, there is a 15 or 20 minute delay on prices that aren't streaming unless you have an account.


Stanley said...

Proper investment planning is always important. Without following a good strategy, it is possible that your money will just be wasted.

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