Getting started with investing (stocks in particular)?

So here's the run-down....
I'm a recent college grad with a fulltime job, but not making enough money to write home about. It's decent for my current standing, but that's beside the point. Unfortunately I wasn't brought up being big into saving money, so I'm just recently getting into it on my own and want to put my money to its best potential... but I'm not sure exactly what to do or how to do it.

Currently I have an online savings account with Emigrant Direct (5.15% APY) with a little over $2,400 in it. I make a deposit into it every 2 weeks on payday. I have 2 other savings accounts that my parents setup for me (one is with Bank of America since I have a checking account there, and the other is at the State Employees Credit Union where I have just a savings account.) In total I have about $4,100 in those other 2 accounts, but they make about 1/5th and 1/3th respectively of interest compared to what I get at ED... so I'm highly thinking about cancelling them and dumping that money into ED.

While the 5.15% interest is great, I seem to get too anxious or impatient just letting my money sit there not doing anything to help compound itself faster... but I also don't want to go taking high risks and throwing it all away.

So I ask... what are some good options for me in terms of investing my money? I don't necessarily need it liquid, but I do like the warm feeling inside knowing I could get to it without penalty if I needed to. Plus, although I still currently live at home with my parents, I want to look into getting my own place in the not-too-distant future.

I've recently began looking into the stock market, but still feel pretty overwhelmed by it. Buying and trading stocks sounds simple enough in the most basic terms, but I don't know enough about the market to make wise decisions (and I don't know how it works in regards commission fees and the like). I have a virtual portfolio that I've been messing around with for the last couple days and it's doing alright (with about $3,200 of fake money invested over 7 stocks, the market closed today with me being $30.70 to the good... so yeah... not exactly a huge turn around and I'd be scared to try to sell any of that and rebuy something else.

Sorry that's a bit long-winded... but I seriously want some advice from people who know more about this than myself, as well as how to actually go about getting it started.

 

Don't look at the stock market like a day trader, where you are in it for the daily churn and burn ... unless you want the stress related to buying a shotgun on sale at Wallyworld to go on a monkey suit hunting spree.

 

There are several stages of investing:

1. Pay off any debt
2. Save up three months worth of income in a liquid investment (something you can cash in with 24 hours notice without any penalties)
3. Combination of medium term and long term investments

So, make sure you do #1 and #2 before you try to do #3.

Medium-term investments might be:
- Save for a down payment on a house
- Save up money to start a business
- Not something like buying a car. They depreciate and lose value over time.

Long-term investments:
- Retirement
- Saving for your childrens' education

Why am I saying a combination of medium and long-term, instead of doing medium-term first, then long-term? Because you'll never get around to the long-term saving that way. Remember, the compound interest formula is:

A = P( 1+i )^n

Which means that the initial amount of money, and the actual interest rate are waaaay less important than the number of compounds, which is to say, the length of time you're investing. So, while you're worries that you might not be getting enough interest, it's more important that you just keep putting something away. I say this in case you stop saving for you retirement, thinking that you can get back to that after saving for something else. Just save for both at the same time.

I'm not going to get into all the different types of things you can invest in, each of which will have different risk/return, varying liquidity, or different tax implications. I'll just assume you actually know what you mean when you say you want stocks. If not, you should research your options (pathetically, pun intended).

There are two main stock strategies (and obviously shades of gray inbetween):
A. Diversified
B. Researched/focussed

The diversified approach is to buy mutual funds or several different stocks in different sectors, that are less likely to all go up or down at the same time. There's a thing called an index fund that can accomplish this the most simply and cheaply. You just put away money every month or paycheck into an index fund, and you get whatever return the market does. This is for people who don't actually know anything about investing, or who know general market trends.

The researched / focussed approach is to find a small handful (2-3) of companies that you know well and believe will do well in the future. You then get access to their financials, and make sure the intrinsics are A OK. Things like manageable debt levels, low inventory, good cash flow, etc.

One thing that can really make a difference with purchasing individual stocks is that many large companies have programs where, once you own shares in it, you can buy more shares, on a regular basis, directly from the company, and not pay any brokeridge fees.

Some people do a hybrid approach of buying an index + researching a few companies. Personally, if I knew that things were in a general recession, then I'd move to some recession proof investments, and not stick in an index while it goes down. Why lose money? Hell, if everything's going down, why not just have that money back making 5.5% in that account of yours?

Oh, and I might as well throw in a more specific stock tip: Whether investments gain or lose money, whether interest rates go up or down, banks have been making a killing for over a decade. Some of them took a hit with Enron related writeoffs a little while ago. Seems like a good time to get in.

 

You are doing good things; saving, asking questions and studying your options. Enlisting an investment professional is usually a sound move. But, that is not a free service. So, some of your investment potential will be spent there. However, it could be money well spent unless you are willing to do your homework. Here are some free tips:

1) Stay out of consumer debt. A good yearly return on your investment will be 'consumed' by 18%-28% interest.

2) Buy a home as soon as you can, even if it is a 'starter'. Do whatever it takes, short of getting into a poor mortgage loan.

3) If applicable, join your company's 401K. If you have matching contribution, maximize what you can afford, then add another 25%. That is what you can really afford.

4) Start an IRA (pre-tax) and self-directed.

5) Start a Roth IRA (post-tax).

6) PAY ATTENTION TO YOUR INVESTMENTS AND HOW THEY ARE PERFORMING.

The best advice anyone can really give you is to study, study and study. This is your future and no one will be as zealous in protecting it as you. I will give you a short description of what my wife and I have done. We are mid-50's and she retired last June.

Me -

401K - 14K/yr with 7K matching. 100% Mutual Funds - 50% growth 50% fundamental
Deferred Comp Plan - 15K 100% Mutual Funds 50% growth 50% fundamental
(3) IRA (pretax) - All equity investments
IRA Roth (post tax) - All equity investments

Her -

Deferred Comp Plan - 15K 100% Mutual Funds 50% growth 50% fundamental (over 35 years)
(4) IRA (pretax) - All equity investments
IRA Roth (post tax) - All equity investments

We own our home clear, plus a rental home clear and two 5+ acre development parcels clear.

1 Roth account is like my slot machine money. I trade freely with it and assume I might lose it all. The rest of our investments are more conservative.

Not sure if this helps you. Best advice - do your homework.

 

Let me start by saying that I really DON'T want to hijack this thread, I am asking this only because it might provide you (the OP) with a little helpful info while at the same time helping me out with useful info without having to have an entirely new thread. If you want this to stay specific to your question, just let me know (here or in a PM) and this post will be gone. (If you don't want to read the whole thing this is about mutual funds)

I am 16, and have a good amount of money saved (close to $5000
in a very low intrest rate savings account. I want to put a medium sized (for me) chunk of money into mutual funds, or some sort of short to medium term range investment so my money can at least be making money. I was thinking mutual funds, a safe one, with a starting sum of maybe $1000 or $1500 (my parents might invest another $1000 or $1500 of their own for their own investment purposes, but also so that I can afford the minimum buy-in to mutual funds which seems to be around $3000). Now could someone suggest a good mutual fund, or if not, explain why not mutual funds and what may be a good investment.

I ask not only for me, I provided my info because it is similar to the OPs, but in general, what would be a good investment strategy for someone with our sums of money in the short to medium term. I know that IRAs and the like are very important for later in life, but for the sole purpose of making money in the 2-10 year scheme of things, what is peoples advice?

 

I'm almost 18 and have been trading stocks for the past 6 months or so. Like you I had a savings account of about $5,000 and I put about 25% of that into an account at etrade financial.
I decided to be risky and be a "day trader" of sorts and play the market day by day. This can be very risky but also very rewarding.

If you want to get into stocks I would suggest buying into "penny stocks"(stocks under $5) and with an online service to avoid huge commissions and have more control.
Dividend stocks usually provide a steady stream of money. Oil especially.

 

no worries Felldownthewell, your question is right along with mine as far as trying to figure out what to do in a somewhat short-term, so maybe it can help pull in some good help.


And thanks for the great input so far, I really appreciate it. While it may not be the smartest thing to do, what I'd really like to do for the next 2-3 years at least is try to compound my savings as much as I can and then go into more investments towards retirement such as a Roth IRA, etc. Plus I don't qualify to be able to put money into my company's 401k until May, which I'll definitely be doing once I can start.

 

This is more or less what I've been more drawn to since it seems like it could have the more immediate result... I guess I'm definitely a product of my environment in that I want results and I want them yesterday. And while I realize the good things come to those who wait, I also don't see the harm in helping myself out along the way.

In regards to penny stocks though... realistically, what kind of turn around could I look at potentially seeing if I were to start with, say $1,500? And doesn't the normal commission fees apply here, so each trade is costing me like $7 to $10 or more (which would seem to put me in the hole if day trading on things that would likely change under $1 in a given day).

And how do you work in that sort of situation? I know you want to buy low and sell high, but are you buying the same stock over and over as it rises and falls, or are you going around buying multiple stocks, etc? I could see probably using an automated system where you decide at what point you want to sell, and then tell it to buy again when it hits another certain point, etc...

 

At the moment there is a shortage of commercial properties in Japan, rents have been on the increase (20% increase last year), and the rental market is likely to tighten a lot more for the next couple of years. Japanese Property Funds typically got returns around 60% last year and this kind of return should continue for the next year with a tail off in 2008. This situation is unlikely to change rapidly as you can't just slap together buildings overnight.

 

Neither of you guys has enough money right now to overcome the transaction costs of day trading. Plus, if you want to be psycho risky with your money, you don't even have enough to open an options account with etrade. And even if you overcame those two obstacles, day trading is very time inefficient. You'll make more money per hour simply working at McDonalds than monitoring your stocks. Don't get too sucked into trying to grow your investments by messing around with them. The vast majority of your growth will simply be from your additional deposits that you save. Really, the trades you do should last for months or years.

That said, stocks are not the best investments for return anyway. There are certain investments that are only available to "sophisticated investors" that have noticeably higher returns. Also, buying debt is quite lucrative. Or my favorite, pick a stock that's noticeably tanking, and short it. But all these things require you to first save up a bunch. So don't worry too much about trying to make a few percent more right now, and sure as hell don't risk losing it. Just, save.

 

Right, which is why I don't want to day trade, but what about mutual funds or treasury bonds which seem more agressive than saving accounts but not nearly as risky as day trading?

 

Treasury bonds are linked to interests rates (actually, they're how interest rates are set). So, a couple years ago they were pretty useless investments. Now the Fed has stopped raising rates, so their return isn't going to noticeably grow for a while. If you can find something that returns at, or better than, prime, and is more liquid, then you might as well just get that. But, if at some point you think we're going to get an interest rate spike, due to inflation or stagflation, then they might be good to get. The key is to have liquidity in bad times, so you can take advantage of the opportunities in bad times. Most people need their money to cover their short term woes, so they totally miss out.

Mutual funds are the most typical investment for most people. There's a fund manager doing all the maintenance, so in theory you can just leave it alone, and it'll grow. The problem is that all mutual funds have a Management Expense Ratio. That's all the money they take away each year to pay for their wages, book keeping costs, advertising costs, strippers... That percent can vary from 1% up to 3%. That means that no matter how much money they make or lose, they take that amount. So, they'd have to make say 7.5% to in the end make you 5.5%. So, part of your research is to choose mutual funds with a low MER. They usually make it really easy to save away X dollars each month or whatever, allowing you to own fractional shares. Like, you can have 100.357 shares. Whereas with stocks, you have to have a discrete number of shares, such as 100 or 101. Most mutual fund companies will let you shuffle between their family of funds without paying any fees. But there might be upfront fees when buying, or fees when selling. Typically, the best situation is to find a back end fee that goes away after 3 or 5 years. So, all your money is working for you right away, and you can take your money out whenever you want, and it won't cost you anything if you wait long enough. I'd recommend finding the best performing mutual fund, and starting to invest in it, as a default. Later you can worry about the individual stocks.

Mutual funds report their returns as a percent gain over time periods, like: 6 months, 1 year, 3 years, 5 years, 10 years. The problem with this, is it's hard to tell how they did in each individual timeframe, to see if they've consistently performed well. Pay more attention to the shorter, and thus more recent timeframes. Good fund managers get shuffled between funds, to bolter their numbers. You don't want to buy one based on how well some guy did 5 years ago. For my work's RRSP (Canadian thing where the money you put in gives a tax break) I simply chose the best consistent performer. Well, after eliminating the very specialised funds that invest in specific geographical areas. Do I want to invest in Latin America, and worry each time some socialist government nationalises another industry? Nope. Do I want to invest in the "Pacific Rim" and worry about trade relations between China, Taiwan, USA? Not with Bush running the show. I'm not trying to make a political point here, I'm trying to say that if you don't keep on track of international politics, then some geographical focussed funds might not be best for you.

 

Bump to this tread. Any other info would be great to have as there hasent been posts here in a long time. I myself am also looking to get into investing and will be jumping the Gun to purchase some stocks with a $3,000 I have aside to burn. (no its not my savings, its specifically set just to play with stocks) so i hope I can learn alot here about them.

I also read about MorningStar.com so i will be diving into their site soon too.