Ask the Readers: Where to Start With the Stock Market?

Start with a discount online brokerage like Scottrade or Firstrade, which I use. The commisions are low, and they’ll do electronic transfers to and from your bank. Start with a couple hundred and pick an index fund, and watch it every couple days. You’ll be learning about the market, even if you can’t invest thousands.

Don’t forget come tax time next year you’ll have to account for your investments, even if they’re small.

Of course, I think we’re all amateurs here, so None Of Us Are Giving “Real” Advice[TM].

I’ll second the index fund recommendation… for now, at least. One of the lessons I had to learn the hard way is, “What is my tolerance for risk?” When I started investing two years ago, I figured, “I’m young. I can afford to take risks and ride out the bumps.” So I put a lot of money into several small-cap stocks.

While I was technically correct in my reasoning, I didn’t account for the fact that those “bumps” turned out to be more like a roller coaster, and that, regardless of how much time I had, I just didn’t have the stomach for it. I spent a lot of time fretting about the day-to-day movements of the stocks I held, and whether or not I should keep holding.

I’ve since sold all of my small-cap stocks, some at an amazing profit, some at frightening losses, but most at a modest profit or loss. In the long run, it will probably turn out to be the wrong move, and I’ll spend the last few years before I retire thinking, “I could be retired already if only I had held…”

Peace of mind for the next decade or more, though, required I get out. If you can’t sleep at night because you’re worried about your stocks, you’re going to end up miserable in very short order.

So, for the next year (or more), I recommend putting your money into an index fund*, and then simultaneously building a “paper portfolio.” Pretend that the money that went into the index fund on a given day went instead to some stocks of your choosing, and test your abilities: ability to make good choices, ability to accept temporary setbacks (sometimes large), ability to recognize when a setback isn’t temporary, ability to refrain from checking the stock price every chance you get (unless you’re training to be a day-trader, I suppose, though I recommend against it).

The added bonus for this is it gives you time to figure out what kind of investor you want to be. Are you comfortable with Technical Analysis? Or are you a value investor? Or perhaps a long-term buy-and-hold sort of person? Or, maybe you’ll decide security analysis isn’t worth the time and effort, and just keep on with the index approach. Remember the site’s motto: whatever works for you.

*Someone here is bound to point out that “index fund” is vague, as there are dozens of indices to choose from. The Bogleheads book J.D. mentioned discusses this a bit, and I have no particular recommendation on whether you should pick any one index over the others, or whether you should even limit yourself to a single index.

I’m a long-time lurker, but I love this subject too much to continue lurking.

I can think of several great resources.

The best, free resource is the Morningstar Investing Classroom: http://www.morningstar.com/Cover/Classroom.html

You can learn a lot by going through all of these tutorials, and even win free stuff too. The other great free resource is fool.com — if you search on the site, you can find “Fool School” which has a look of great info.

I second the recommendaiton on “The only investment guide you’ll ever need” if you’re a complete newbie.

The other one I’d recommend, if you want to learn about the fundamentals of equity analysis in a layman’s way, read “The Little Blue Book that Beats the Market.” Great overview of value investing.

In general, I’d recommend mutual funds from Vanguard, cause they’re no load and have very low expenses. I guess I “like” index funds, but think you can get better returns if you have a diversified portfolio of slightly more managed funds, or specialty index funds, like small-caps, growth, value, etc. But I do think it’s valueable to buy one or two stocks, just to get it out of your system and, if you take an active approach, learn more about analysis.

You could also look into sharebuilder.com (I think that’s the site) — it allows you to invest what you can, but build up shares overtime in a cheaper way than at many brokerage houses. I can’t speak to their costs though, and don’t know how that would affect your return.

All my thoughts have already been mentioned. Here are the things I’d highlight.

The Bogleheads’ Guide to Investing is a great place to start. I’ve read many books on personal finance and investing over the past 15 years, but Boglehead is the one that made everything click for me.

Before deciding to invest in stocks, consider index funds. If you can’t afford to buy into a mutual fund, there are lots of equivalent EFTs.

Of COURSE I’ll weigh in. But only to say that your last paragraph is the most important. Along with the truism that there are no short cuts in life, no foolproof get rich quick schemes. (Hmm, reminds me of a blog…)

I’ll also throw in a plug for Malkiel’s investors bible, A Random Walk Down Wall Street. Now in it’s ninth edition, Random Walk is one of the (if not THE) most often cited works in the investing/personal finance field.

Seconding the Motley Fool. There is a lot of sensible advice on their site and in their books. You Have More Than You Think: The Foolish Guide To Personal Finance is a bit dated in style having been published right at the end of the dot-com bubble, but the advice is still great and not at all dot-com-influenced. The Motley Fool Investing Guide is sort of their intermediate course, to read after More Than You Think, and similarly suffers from its era in style but not advice.

Note that the Fool directs itself at people who want to be a bit more directly involved in their investing than the type who would go with mutual and index funds — which might mean sacrificing some returns for a higher level of engagement, balancing a stable financial plan with an investing hobby.

I agree about broad market indexing but would also include focused indexes as well using ETFs and low fee mutual funds (I have China stock market and REIT index ETFs among others.)

I’ve also recently read Rule #1 by Phil Town and The Tao of Warren Buffett by Mary Buffett. They both have similar investing messages but you can’t argue with the man who has beaten the overall market for the last 40 years.

You can’t invest in index funds on Sharebuilder, but you can invest in their equivalent ETFs. For example, you can invest in VTI, the ETF equivalent of Vanguard Total Market. It carries an expense ratio of 0.07% and gives great breadth of market exposure.

I found I could get a list of all the Vanguard ETFs in Sharebuilder by searching on “Vanguard” in the general search function.

This is not my recommendation of VTI (I’m in no position to make stock recommendations), but I sure do like it and so do a lot of Vanguard investors. Another Vanguard ETF I’m keeping an eye out for is their new international ETF that includes Canada — not sure what it will be called but it will have “ex-USA” in the title –currently Vanguard’s international ETFs exclude Canada which doesn’t make me happy (think exposure to oil sands companies). I’m waiting for it instead of putting money into European+Pacific ETFs.

Oh, finally — Ben Stein has a recommended “no-brainer” portfolio of 1/3rd VTI (US total), 1/3rd EFA or EFV (total int’l or int’l value), and 1/3rd AGG (broad bonds). There are some other variations on this theme at http://www.marketwatch.com. Right now there are no ETF equivalents to Vanguard’s total international or total bond index funds, but the new “ex-USA” will be a total international ETF, and a total bond ETF is also supposed to be coming out this year. My sharebuilder plan is to start with VTI and then add the other two ETFs when they are available instead of EFA and AGG.

gmv

I recommend 3 things (in this order) for a beginner.

1) Motley Fool’s 13 steps at http://www.fool.com/school are pretty good! Steps 1 – 9 are the really good information; steps 10 – 13 are really just soft sells for their products.

2) How to Make Money in Stocks by William O’ Neil (Founder of Investor’s Business Daily) is a fabulous book if you’re considering constructing and managing a portfolio of stocks that you pick (instead of investing in index funds, ETFs, mutual funds, etc)

3) My site: http://www.edmamula.com …more of a currency trading blog, but I’m posting more stuff for beginners, since I realize that it’s tough to know what to do when you first start out.

Good luck!

By the way, I have a Zecco account. The trades are free, so that’s very nice, but the user interface is WAY more complicated than it needs to be…too many tabs and options, and I have a hard time finding what I need! I think they’ll get better in time, but for now it might be easier for a new investor to start someplace else.

The best thing this person can do is to invest in himself. While it is great to learn about stocks and bonds, potentially the best thing he could do is to stick the money in a lowcost index fund, and spend the time and energy on himself. Learning a language, additional skills, or starting a business will likely yield much higher returns that the time in the market. At his age, starting a business has much lower entry costs, than when you have a family/mortgage etc. If he goes belly up in a year, as long as he keeps the debt minimal, no harm done!
If this is a hobby, great, fine, but remember if you are trying to get the most bang for you buck, at his age, improving your employment worth or entrepreunial skills are the best way to go.

I would also like to recommend the book “The Bogleheads’ Guide to Investing” Very informative book about how and where to put money in the stock market.

People starting out in investing that don’t have a lot of $$$ to sink in initially (like myself and most students) can get the most exposure to the market through mutual funds, accumulate wealth over time then choose to diversify in individual stocks when you have a balanced portfolio.

Mutual funds are also recommended over stocks because your money is spread out and managed. The fund will possibly follow the market if there is a sudden downturn, but you’re not likely to see a fund go bankrupt unlike a particular stock.

The Boglehead’s guide will encourage the most time tested method of investing, and that is putting money in the market and leaving it there for the long haul. Good luck and be sure to read up before you make any serious commitments.

I think Cramer’s advice is ok, except for two things — the biggest issue I have is it does take quite a bit of time to learn about how to pick individual stocks well, and as somebody else mentioned above I think for the individual person this is probably TIME better spent on such things like improving oneself and one’s career knowledge base.

My second issue is that its sufficiently risky in and of itself to put money into something like VTI. The less money you have, the more risky it is to lose even one dollar. Reasonable capital preservation should always be a criteria for investment. If you have only $50 to invest and can only pick one investment, it’s exponentially more risky to pick a single stock than if you have a significant amount of money and can put money into multiple stocks. That $50 would be better put into an ETF or mutual fund where there is some built in diversification. Alternative, you could let your money build up until you have a significant sum (like $10K – 20K as a BARE minimum) to start buying shares of multiple stocks.

Just as a point of comparison, if you study stock market trading (short term investing, all the people who do it say not to even bother trading stocks if you are undercapitalized, and what they have in mind is something like $50K. Otherwise the risk is too high.

Daedala — You’re absolutely on target. The first thing our young investor should do is start a Roth IRA and start building his long-term wealth (I think those of us talking about index funds were implicitly assuming it was a long-term investment).

After he’s gotten a taste for diligently saving his yearly contribution to his Roth IRA and learned how that works, and when he’s a little more solvent (e.g., out of school and employed with extra money), he’ll have plenty of time to also pursue individual stock investments if he wants to.

I can remember being where Jono is now and being so bombarded with seemingly conflicting expert advice that I did nothing for years. My advice is 1) start investing young to take advantage of compounding 2) invest automatically either through payroll deduction or an automatic investment from your savings account 3) choose a low fee total market index fund like Vanguard. Don’t let the quest for the perfect investments waste your most valuable investing advantage – time. The book “The Automatic Millionaire” lays this out in steps that you can accomplish in literally a couple of hours or less.

If you want to get fancy later on, the recent Consumer Reports has allocation recommendations that pull in some foreign stocks to a total market mix.

Here’s all the advice you need:

Ameritrade/Scotttrade/Fidelity/ETC to invest in the stock market in individual stocks, charge you $20. $10 to buy, $10 to sell.
If you hold a stock for less than 1 year, you pay around 35% in taxes. If you hold for more than 1 year, you pay around 15%.

See all those costs?

Vanguard & Fidelity require around $3k to start in on a regular fund. Save your money for the $3k and skip the stock market. They require less for a Roth IRA, and that is tax free at the age of 55 or so. Once you have invested around $6-10k per year (between a Roth and regular index mutual fund or all in an index and skip the Roth), then you can try to invest in the stock market.

Hopefully someone is still reading these comments.

You’ll soon find one way the participants of the stock market are divided is whether you can beat the market or not. Those who don’t think you can beat the market are recommending Random Walk Down Wall Street.

If you have the time to learn how to pick your own stocks, then you can follow one of the active investing/speculating strategies. If you don’t have the time to invest intelligently, then go with index funds.

A group that believes you can beat the stock market over the long term is Value Investors. The bible of value investing is The Intelligent Investor by Benjamin Graham. Other good books are One Up on Wall Street by Peter Lynch (mutual fund manager). Joel Greenblatt has also written good books on the subject.

A nice little introduction to Value Investing is The Little Book of Value Investing by Browne (dun remember his first name). If you are only planning on reading one book on value investing, read that.

Some more (not entirely correct or complete) info here:

http://en.wikipedia.org/wiki/Value_investing

For the sake of full disclosure, I am a value investor and I’ve done extremely well. However I realize that value investing is hard, but I do recommend looking it up if you want to pick your own stocks.

Thanks everyone for the great advice!

As for my money situation right now, I don’t have any loans to pay off as my parents make a good amount of money so they are able for everything (tuition, housing, etc) as they come.

However, I hate relying on my parents for money and want more than anything to be financially independent. I plan on accomplishing this through two ways:

1) I am on the verge of opening up an e-business within the next few months
2) The revenue I generate from my e-business I will invest in other areas (ie. stocks, index funds, etc)

Hope that helps explain some things. Once again, thanks for all the advice.

Investing is a tricky subject, especially for the average college student. Once I started with real money, I put 3k into a Roth IRA. The beautiful thing about them is that they don’t complicate the taxes, and as a student you’re almost certainly going to be in a lower tax bracket than when you pull the money out. You can take out as much as you put in without penalty, and after a waiting period, you can take like 10k and put it towards a home. The trouble is that most IRAs require a minimum investment the average student just doesn’t have, or a monthly contribution the student just doesn’t make.

I presume that your desire to break away from dependence on your parents includes the desire to not take a starter gift from them. In which case, I recommend you simply stay away from the stock market and focus on mastering your studies: education is a far better investment than a meager index fund can ever provide.

If you’re planning on starting your own business venture, don’t bother with investing the returns in the market: you’re admitting you can’t do better than the market average! You should be looking at the stock market, but mostly to gage your own performance. As a young person you don’t have the responsibilities of a mortgage or children to risk. Most of all, you know the business manager and their situation far better than any share you could purchase. If you make sure to keep accurate books, this will be far more instructive than putting shares of Fidelity Value (FDVLX) into an IRA. You’ll be able to really understand what it means when a company’s operating margins are twice their competitors, and why some people are concerned when a company announces a dividend.

If you’re dead set on learning about the stock market, I suggest:
* reading at least Warren Buffet’s old parable about the Haves
* investigate what effects a minimum wage increase will have (hint: if there’s a serious and sudden increase in wages, a lot of people will want to move out of the various crappy homes they could previously barely afford to somewhere with less rats, and better schools).
* Discover what the yield curve is, and what the current curve suggests.
* Then reconcile the curve with an increase in minimum wage. There’s simply a hell of a lot of information to interpret before you can be even moderately successful at picking individual stocks, and even then, nobody knows how to resolve conflicting data besides waiting.
* Find 3 publicly traded companies that run mutual funds as their primary business and compare the performance of their funds to the performance of their stock. Which would have been a better investment?

I recommend you study a group of stocks that you are interested in and see how they perform first. If you want, search the web for the “pretend” sites that let you pretend to invest a tradeable item at a specified price and then see how that goes.

When you do go to buy a stock, bond, etc, think of one thing first: How long am I going to hold it? If the idea is forever, then commission doesn’t really mean that much. If shorter than that, then maybe you might lose money on stock that has grown in value. How?

Let’s suppose I buy 100 shares of XYZ at 5.00 per share for a cost of $500. I paid $8.95 in a commission to buy the stock so my total cost is 508.95.

I then notice the stock goes up .10 and I think, “wow, I just made $10.00″ and sell the stock. I now pay another $8.95 to sell the stock, meaning I paid $17.90 in commissions and lost $7.90 on a stock that made $10.00. On top of that, I still may have to pay taxes on the $10.00 in gains.

Another approach if you are weary about getting your feet wet, it to look at some mutual funds. Definately not, they are not created equal, so check them out good. Many have high fees and bad returns. On the good side, they invest in many more stocks than I could ever invest in, so the right mix of funds might work for you.

Good Luck!

Something like 75% of mutual funds don’t been the S&P…

As a result. the S&P is now overvalued once everyone figured that out (or was) ?

The Graham book is (Intelligent Investor) is a great place to start though….solid fundamentals that Buffet bases his investing style on.