I want to start investing money in the stock market. What should I do?
Posted by admin in Finance Tuesday, 15 November 2011 22:08 7 Comments
I’m 19 years old, and I want to start investing in the stock market. How much money can I make over the next years if I’m good with buying and selling stocks..? I am ready to invest $100 as soon as I can and then build off the next weeks when I get paid up to $1000. What should I do first, and where do I go first??? I am confused on how to start investing.
The first problem you will have is that most (if not all) brokerages require you to open up an account with $500 minimum deposit. So you will have to wait until you get that much before starting to invest.
As for how much you can make, the stock market historically returns 8% per year, so if you had the entire $1,000, you could expect to make about $80. However, that does not include commission, which is usually around $7 per trade, so if you bought and held $1,000 worth of any stock and made the historical average, you would have $1,073 at the end of one year.
If you were an active trader, at $1,000, the commissions would probably eat you up ($7 for each buy and $7 for each sell means you would have to make a 1.5% on your investment before seeing a profit)
Before you even think of investing, your should read a book on two on stock market investing and then after that a book or two on analyzing stocks.
Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and money market funds. If you are like most people you will invest part of your money aggressively in stocks, and part conservatively in money market funds and bond funds. However, some young people will go all stocks, and some very conservative people will go all money markets. The links below have on-line questionnaires which will give you an idea of how to do “Asset Allocation,” determining how much to put in each type of investment.
You want to buy a diversified portfolio of stocks as individual stocks are too risky. Highly knowledgeable people can buy a properly balanced portfolio, but most folks have a difficult time balancing things on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Back in 2000, Some people bought all Internet stocks; they got burnt when they all crashed together. You have to diversify across industries. Unless you know what you are doing, it is best to buy mutual funds that will diversify for you. Buy no-load, low cost funds. Mutual funds should have expense ratios of less than 0.4%.
I like index funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest management fees. For stock funds, I like putting ~70% of one’s money in the Vanguard Total Stock Market Index Fund. and ~30% in the Vanguard Total International Stock Index Fund. The Vanguard Total Bond Market Index Fund is good for a bond fund. The Vanguard Target Retirement funds can be a good all-in-one stock and bond funds for an IRA. (Since you have less than 3,000 dollars, you’ll have to use the Target Retirement Funds) There are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.
Once you have stared investing, you need to keep adding money on a regular basis. Many funds allow you to set up automatic investment programs that take a set amount of money out of your bank account each month.
If your company offers a 401K plan at work, try to invest the most you can. The money grows tax free, and some companies will match your contribution. Investing in a mutual fund IRA is also a good idea.
If you have high-interest debt, like credit cards, it is best to pay this off first before trying most of the investment ideas above. You should also have 3-6 months of salary saved up as an emergency fund in a bank or money market fund before trying more risky investments.
I will warn you that there is a tremendous amount of stock investing books and websites that teach stock investing strategies that don’t work. Particularly bad are people that teach “technical analysis” systems that sound impressive, but don’t work.
Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor. They will charge you significant commissions, however.
I do trading for a living and I think you should know there are 4 areas of trading or investing; analysis, risk management, execution, and emotion management. Your question, “how much money can I make…” tipped me off that you don’t have a plan for risk management. Ask this question instead: “How much money will I lose before I stop and revise my plan?” I earn close to 100% per year trading my small account (by small, I mean tens of thousands). I drained my account 6 times to learn the lessons that make me a good trader. Most professional traders say not to even start if your account is smaller than $5000 because of the cost of trading commissions that go to the broker. To improve your chances of success I’d research the four areas of trading/investing that I mentioned above and find other successful investors and hang around them. A local trading or investment club might be a good option for you.
What I would do is find a very low cost broker, such as Scottrade. This will allow you to make trades relatively cheaply.
Now you will then need to conduct research. I would recommend a company such as Marketgrader.com. Marketgrader.com will provide you with the fundamental research and analysis that you need. Then you can buy the stocks from Scottrade that have the strongest fundamentals.
If you’re good, and not too risky, you can average about 10% a year in returns. Don’t believe anyone who claims to be able to double or triple your money… they can’t.
Before you even think of starting read up on risk management, study some basic game theory. Understanding risk reward is key, a lot of people spend all their time on what to invest in and fail. The successful formula is what and when to buy when to sell and stick to your rules. Do not get stuck on one idea, always have an exit plan and move on. The most successful hedge fund managers and traders make their money by being good risk managers.
Scott trade is pretty to use… as in ING Direct. But before buying any stocks read up on companies, see if they have new products or services coming. Then there’s always your safe picks to invest in; such as Mcdonald’s Corp, Pepsi or Coca Cola, Health Care etc…. those almost never go down. In fact McDonald’s has had a decent gradual climb over the last few years
To Start Investing
It takes a long time to learn the stock market and it would help if you read some books from your library and information online. It would also help if you did some practice trading with play money. You can do this by using a watch list in Yahoo Finance > My Portfolio. Just pretend you bought some shares of your choice.
No one can tell what you should invest in the market. You need to decide what’s right for you at the present time. Before you start investing, the first thing you need to decide is what risk level you want to take. CDs backed up by the government has about 3-4% annual return for the long term with a low risk. Bonds or Bonds Funds has about 5-7% annual return for the long term with a medium risk. Stocks or Stock Mutual Funds has about 8-10% annual return for the long term with a high risk and are more volatile than Bonds. A person can make more than 10% annual return with the right investment. Usually the more risk you take, the more return you will have, but not always.
The stock market is basally made up of stocks and bonds. Investment managers pick a group of stocks to make a mutual fund or a group of bonds to make a bond fund. They even put a mixture of stocks and bonds together and call it a Growth & Income Fund.
1- MUTUAL FUNDS: Mutual funds have a group of stocks (could be around 100+) invested in different sectors, and manage by a professional. Managers have lots of schooling for investing in stocks, around 8 years. So I think managers can pick stocks better than I can. There are lots of different kinds of mutual funds and they have different risk level. There are 100s of funds that does not charge any fees to buy it’s shares and they are called Noload Funds. There are also some funds called Load Funds that charge about 5% of your investment. You can make a buy or sell order anytime of the day for mutual funds shares but it will not go in affect until the close of the day. Most funds has trading restriction and you may not be able to trade more than 4 times a year. That’s because it makes it hard for the fund to make a good return if there is to much trading in the fund, causing the fund manager to make more buys and sells and keep more cash on hand. Mutual funds are meant for long term investors.
2- STOCKS: Stocks is more volatile than funds unless you spread you money in several different areas and know witch area will do best. There are 10 stock sectors and over 100 sub-sectors to choose from. Stock trading restriction is only a few days, not like mutual funds. If you own stocks, you will need to keep up with all the company’s business so you don’t get stuck with a bad stock. That could take a lots of time. If a person buys just a few stocks he probably is hoping to make a bigger return but he may be taking more risk. If that’s the case, look at the leverage ETFs that represents a large group of stocks. That could be another choice.
3- ETFs (Exchange Traded Funds): ETFs are like a mutual fund but trades like a stock and that is the main differences between ETFs and stocks and mutual funds. There are some ETFs that represents Index’s. An Index is like S&P or DOW. Index’s operate just like a mutual fund with a group of stocks in deferent sectors, manage by professionals. You can’t buy Index’s because they are not for sell. A company owns them. But you can buy a mutual funds or an ETF that has the same stocks as the Index they represent. There are a lots of different kinds of ETFs for someone to choose from. There are some that represent almost every kind of sub-sector. And there are some that have 1x leverage, some have 2x leverage for aggressive investors, and some has 3x leverage for more aggressive investors. If you wish you had more money to invest, the 3x is like having three times the amount of your money in the market. You will make more in an up market but lose more in a down market. One example; S&P500 1x vs S&P500 3x:
S&P500 1x …… 2010 = +12.8%…..4/29/11 YTD =…+8.4%
S&P 3x (UPRO) 2010 = +36.4%…..4/29/11 YTD = +26.9%
To buy stocks or funds, you need a broker account. You can open an account online or in a broker house and it is free to open. You can find several good discount brokers that charge $8.00 and under per stock trade and no fee on Noload Funds. If you only have a small amount of money to invest, it may be best to start in Noload Funds because of the broker fees. Most broker websites have good research tools. Some popular broker websites are Fidelity, TD Ameritrade, E-trade, Scottrade and others. You need a min. of $500 to open an account in Scottrade and $2,500 for Fidelity. Other sites may very on the min. and you need to be at lease 18 years old. If you not 18, you might could get your Dad to open an account for you.
Self-taught from 24 years of experience. Click my pic if you need more help.