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

Jono is ready to dive into stock investing, but he doesn't know where to begin:

I currently attend UCLA and am just a first year (undergraduate), but I am extremely interested in investing in stocks after reading some of your articles. Doesn't hurt to start early right? I am skeptical as to how to start the process though, and I don't really want to turn to my parents because I don't feel like they have had that much success in that area.

Are there any good novice stock investing books I could read? I'm not entirely sure what is necessary to be successful in the stock market. I read everyday on the technology industry. Does knowing current events about the area you want to invest in important? (I would think so) I came upon Virtual Stock Exchange recently, and it looks like a good resource to just get a handle of it. Have you ever used it before?

Basically, I am just looking for advice on how to start investing in stocks.

I offered a brief reply via e-mail, and promised Jono that I'd let you readers offer your advice, too.

First, I think it's great that he's making this move at such a young age. Compound returns favor the young — the best time for anyone to start an investment program is now — and by investing just a couple thousand dollars a year for the next decade or so, Jono will have a terrific head-start on his peers.

Second, I recommended The Only Investment Guide You'll Ever Need and The Bogleheads' Guide to Investing as good books about the subject. The former is more approachable, but the latter is more comprehensive.

Finally, I pointed out that successful investing is not sexy. A good investor generally buys boring stocks and holds them for a long time, rarely selling. The easy path to success is simply to stick your money in an index fund. It's boring, boring, boring, but chances are it will make you rich.

What words of wisdom do you have to offer a young person just getting started in stocks?

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Dan
Dan

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.

William Wallets
William Wallets

Definitely don’t be shy about getting started with even a little bit of money. It’s ok to get your feet wet, but definitely read some books or get some experience before you dive in head first.

I made a little primer about getting started with investing! Would complement this post nicely:

Investing 101: Components to Create an Allocation

Thanks for the good post JD.

-William

majeest
majeest

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… Read more »

Anna Matetic
Anna Matetic

With many mutual fund companies, if you have a certain amount automatically invested each month (the fund company takes the deposit directly from your account via an ACH transfer), they will usually waive the large account minimums. This way, you can invest directly with the company and bypass brokerage fees. The drawback to this is you would have to be able to invest about $100 a month. Some will do it for $50. Another option would be Sharebuilder.com If you are not doing real-time trades (actively trading) but plan to invest in low amounts, say $25 a month, you can’t… Read more »

Chris
Chris

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… Read more »

squished18
squished18

Check out the Motley Fool discussion boards. A lot of free discussion boards with a lot of good information, if you’re looking on the right ones.

One caveat, if you hang around there long enough, you’ll likely end up buying some services from them. Not that that’s a bad thing.

I am a Motley Fool Hidden Gems subscriber, but otherwise do not have any affiliation with them.

Daisy
Daisy

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.

Dan
Dan

If education is at the top of your priority list, why not find an investment club? They’re a great place to learn and don’t typically require a huge amount of money to invest (GREAT for a student). Check out investmentclubhelp.com for some basic information. There may even be some opportunities on campus as well.

Tinyhands
Tinyhands

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.

Angela
Angela

I’d suggest trying to understand why index funds are so strongly recommended. And also investing in shares in companies that you really understand.

I’d also second the idea of creating a paper portfolio, to see how your tolerance for risk is.

rich
rich

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… Read more »

Canadian Dream
Canadian Dream

I agree that you want to most likely start with index funds. They have the sex appeal of a frog, but they do make money over the long haul.

Then get reading. I personally liked the Intelligent Investor by Benjamin Graham. It gave me some much needed insight into if I’m a stock picker or just an index investor.

Best of luck,
CD

Jim S.
Jim S.

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.

Toby
Toby

Here are some thoughts. 1) Virtual Stock Exchange: Almost worthless for a beginner. Stay away for now. Why? Because I can practically guarantee that a beginner will not develop practical stock analysis and valuation skills if they spend time trading on a virtual stock exchange. If there is no risk there is no motivation to make good picks, you’re just going to read some news and buy something. That’s a really bad habit to get into (I know, I used to do it early on). I believe it’s much better to get some skin in the game and pay close… Read more »

gmv
gmv

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… Read more »

UncleOxidant
UncleOxidant

I’d stick with ETFs at this point and I’d choose no more than about 4 to start. The Vangaurd ETFs seem to have the lowest expenses so I generally tend to prefer them. I’d recommend VTI (Vangaurd Total market Index) for it’s broad US market exposure. Since you don’t want all your eggs in the US basket I’d recommend VGK (Vanguard European market) for exposure to the European market and VWO (Vanguard Emerging Markets ETF) for emergin markets. …given the news of this morning, though, from HSBC about mortgage default rates in the US I’d probably want to stick some… Read more »

Ed Mamula
Ed Mamula

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… Read more »

gmv
gmv

BTW, I have two recommended websites for following the market:

http://www.morningstar.com
http://www.marketwatch.com

I’d recommend starting your reading with “The Boglehead’s Guide to Investing”, “The Intelligent Investor”, and/or Andrew Tobias’ “The Only Investment Guide You’ll Ever Need” (though it’s not).

Jay S
Jay S

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… Read more »

UncleOxidant
UncleOxidant

Another great website for following the market:
http://seekingalpha.com/

Under their ETF section they have a great tutorial on getting started with ETFs.

adam
adam

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… Read more »

Mike Panic
Mike Panic

I saw an interview with Jim Cramer (Mad Money) a few weeks ago and they asked him what a young person should do when they are starting out investing. He said something to the effect of, take as many risks as you can and be somewhat crazy with your investing, you can make it big but if something goes wrong, you still have more then 3/4 of your life to make more money. He later went on to say that there is nothing wrong with high yield CDs and savings accounts. Personally, I’m finding it hard to get out of… Read more »

gmv
gmv

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… Read more »

Daedala
Daedala

I am surprised that no one has suggested a Roth IRA in a nice, boring mutual fund. As an undergrad, your taxes are probably waaaaay low; putting in after-tax dollars that you withdraw tax-free a zillion years from now is an excellent deal! Compound interest is your friend. I have found the relatively safe (if boring) retirement accounts a good way to become comfortable with investing. It’s not wheeling and dealing, but I got used to dealing with the online financial sites, figuring out what those Morningstar stars meant (not what you think), expense ratios, why “beating the fund’s chosen… Read more »

gmv
gmv

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.

TFB
TFB

For beginners I recommend Burton Malkiel’s The Random Walk Guide to Investing. This is a smaller version of the classic A Random Walk Down Wall Street book. It’s about the same size as The Only Investment Guide You’ll Ever Need book by Andrew Tobias.

Spend $10 on a good book and get an education before jumping into anything.

Tom
Tom

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… Read more »

KJK
KJK

All good comments on what to research, what to invest in, and where to do it. I second the notion of having funds saved for emergencies first. This might not be the best time for Jono to be investing. As an undergrad, how are the student loans going? How about the credit card debt issue? And what’s his time horizon for this money? In 3+ years, he’ll graduate and will be job searching. Potential expenses for housing, transportation, work wardrobe, and student loan payments. Take care of the basics now. You’ll still have plenty of time to invest when you… Read more »

beanspants1
beanspants1

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.… Read more »

RT Wolf
RT Wolf

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… Read more »

RT Wolf
RT Wolf

One more thing, you’ll find many long-term market beaters among Value Investors. I’m not saying that you’ll beat the market (beating the market is hard work no matter what you do), but I think of it as a good signal that the strategy works. Another thing is google a paper called, “Can Individual Investors beat the market?” I think.

Cheers! Start early!

Jono
Jono

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,… Read more »

tim
tim

start off boring until you get your feet wet. Buy companies that have been around a long time. Diversify by buying mutual funds or index funds. I’m amazed I have not seen anyone comment on doing your research. Not on how to invest or buy stocks, but on the companies that you are thinking about buying stock in. Know about the company. You are giving the company a loan to operate, so you should want to know what is going on with them, how they operate, who operates them, what environment they are operating in (i.e. competitors and where they… Read more »

jldugger
jldugger

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… Read more »

JohnK
JohnK

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.… Read more »

jose
jose

if you’re still thinking about stocks, i recommend using Firstrade (www.firstrade.com). It has a low commission fee ($6.95) and no minimums, although as others have mentioned before, education should be a priority of yours and should be your primary focus now

Richard Martin
Richard Martin

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.

ajc @ 7million7years
ajc @ 7million7years

A brilliant web-site – and, useful companion to the wonderful book “Rule # 1 Investing”, referred to by a reader in the comments above – is stock2own.com

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