I am COMPLETELY new to the world of investing and was looking for a group like this. I want to get my feet wet in investing and could use some basic guidance. Regardless of whether or not I picked the right place to do this, I placed $1,000 into an etrade.com account and will be able to invest it by this Monday most likely.
This is a sizable sum for me, but it would not be the end of the world if I end up at a loss. I want to make a risky short-term investment in a stock and am a bit overwhelmed by the amount of options. So, I have a few questions for people more knowledgeable than I am.
- What's the best place to find ideas for what stock to invest in?
- Considering I want to make a risk and would be happy with nominal gains of just a couple hundred dollars, would I be wiser to invest in a single stock or multiple stocks?
- Is there a better option (mutual fund/bonds/etc.) that I should be considering?
Thanks in advance for any advice! Richard
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The old saying goes that anyone who is willing to lose a little is shortly going to lose a lot. That is not a good plan for the way the market currently stands. If you want excitement, head to Vegas and put it all on red.
If this is your first experience with investing, I would suggest starting by building a core holding that is in a cash-like investment that can be gotten at relatively soon. If you want to try the market, thinking that stocks are on sale right now, look at one of the indexes.
The final issue is how small of an investment E-trade will support. Since there are commissions on trades, it really isn't cost effective to make small trades at a brokerage if you have to pay to get in and pay to get out.
If this was my $1000, I'd put it all in an FDIC protected CD. Specifically, I'd look for a higher yield brokered CD that has a little more juice in the return.
If you can make $500 investments, keep 1/2 in the CDs, and the other 1/2 into an indexed stock fund, such as one based on a larger index. Maybe the Total Market Index, Wilshire
5000, or Russell 2000. You might find a mutual fund that does this, or an exchange traded fund (like the VTI "viper").
There are a lot of things here for you to read about and learn how they work. This includes no-load funds, index funds, stock indexes, exchange traded funds, and cash-like investments (CD's, money market, treasuries, etc). Don't invest in anything that you do not fully understand.
You don't provide enough information to give a meaningful response. Is this $1000 all the money you have? Do you have an emergency fund? What is your age? What are your responsibilities? What is the purpose of the money and how soon will you need it?
All of that if far more important than a particular investment.
Brian
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This is how I started trading individual stocks, and I started with E-Trade as well. They've worked well for me over the years.
I like the Peter Lynch view of investing in what you know or can readily observe. If you work at the mall, you probably have a good feel for what stores are doing well; if you're an engineer, perhaps you know who's winning all the contracts lately, etc. That can be a good starting place to figure out which stocks to research. Investment clubs are good for getting disciplined and frequent research while sharing the research load across several individuals.
Anyone would be happy with nominal gains of a couple hundred dollars on $1000 invested. You'll need to be happy with less to avoid disappointment. Owning fewer stocks (or only one stock) will decrease your trading costs which will not be insignificant at $1000 invested, but there's wisdom in the old adage about putting all one's eggs in one basket.
John and Brian make valid points, you may be better off in investments other than individual stocks for various reasons. However, this is a good way to learn about investing in individual issues without a huge amount at stake - as long as you can truly afford to lose that $1000.
Good luck,
-Will
william dot trice at ngc dot com
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First off, ETrade is a terrible site to use. I use TradeKing.com, it's only half the commission.
I should also mention that short-term equity investments are... well, not the smartest thing to do, especially with all of the volatility in the market right now. You should invest longer-term, and your goal should be to invest in profitable companies that will pay you a good dividend. Dividends (which you then re-invest) should be your goal, not speculative increases in the stock price. I look for companies that fit a few basic criteria:
- Low debt to equity ratio.
- High current (current assets/current liabilities) ratio.
- Solid cash flow.
- Growing demand for their products.
- Durable competitive advantage - something about the company that gives them a leg up on the competition, and which isn't easy to emulate. This is easier said than done.
- Costs that are under control, or that can be passed along (inelastic demand).
- Low P/E ratio relative to the industry.
- P/E ratio at or near its 5-year low.
- Good dividends. Very important. This is where Buffet and most other successful investors have made their money.
- Stock price at or near its 52-week low.
- Industry leader in measures of management effectiveness, especially ROE and ROI.
- Industry leader in per-employee revenues and income.
- Solid across-the-board past performance (but realize this doesn't necessarily predict future performance).
Now, it's unlikely you'll find any companies that will fit all of these criteria (if you do, please let me know!), but those are some good guidelines. Also:
- Do an hour of homework a week for each stock that you own.
- A strong, assertive, accountable board of directors is the most undervalued asset a company can have.
- Invest against the wind - look to buy when everyone else is terrified, sell when everyone else is euphoric.
- Along the same lines, if everyone else thinks you're crazy, you may be on to something. A lot of my friends and family told me I was crazy when I tried to get them to pony up some cash to short Lehman with me at 72 and change, and then double-down around 44 after a rally. The nay-sayers are now telling me how much they wish they took my advice - in between bites of humble pie.
- If you insist on buying for short-term gains, look for companies that have been beaten up by recent events, but are fundamentally strong.
- By and large, a P/E over 30 means "sell sell sell!" There are exceptions here, but if you're sticking to the basics, that's a good rule.
- You're buying (or selling) a stock to make money. Don't develop an emotional attachment to or cognitive bias for the firm.
- Remember that when you're buying an equity, you're buying a fraction of the company's future income - not a magic ticket that you expect to rise dramatically in value. Dividends are the goal, and don't forget it.
- Reinvest your dividends.
- Diversify your portfolio (duh).
- Pay attention to political events and changes in policy, and how that will affect your assets.
- "Common Knowledge" (i.e., everyone knows Brazilian gov't debt is risky, but US gov't debt is as safe as you can get) is overvalued. As the saying goes, common knowledge is that which everyone has and nobody questions, but which is usually wrong.
- If you have credit card or other high-rate debt, pay that off before you even think about saving/investing. A lot of people want to save and slowly pay down debt (to build a rainy-day/emergency stock of wealth), but think about it this way - if you could buy a security that guaranteed you a 19% annual return with absolutely no risk, wouldn't you be crazy not to? You can always use your credit cards if something comes up, but in the meantime, why would you sit around paying usurious interest rates if you don't have to?
- Don't follow the herd, unless you like under-performing the market.
- Manage your emotions. Be as cool, calm, rational, and level-headed as you possibly can. Never make trades when you're upset (or joyous) about something else.
Some things not to do:
- Never buy a stock just because it's increasing in value.
- Never sell a stock just because it's declining in value.
- Don't buy near a 52-week high (unless there's an overwhelming reason to do so).
- Don't buy stock in a firm that has a product or business model you don't understand. Very important.
- Don't buy stock in a company that uses byzantine or questionable accounting practices.
- Don't buy stock in a firm because it or the industry is "cool," "in," or is otherwise heavily hyped.
- Don't try to "time" the market or chase trends.
- Don't buy stock in companies that have bloated executive compensation packages.
- Don't buy stock in companies in which insiders are selling.
- Don't neglect your portfolio - always think about how you should reevaluate and rebalance your holdings.
- Don't ever lose money.
- Don't ever forget the previous rule.
Don't ever take the attitude that it's OK to lose a bit. You're not investing to lose money! If you're new and want to practice, get a fantasy stock market account. If you're just trying to gamble and/or catch a thrill, go to a casino instead. You'll lose money over the long run, but at least there you won't be under any illusions about what you're doing.
A good site is fool.com, but be wary of buying a stock just because it has a high CAPS rating. You can get the basics about a stock in many different places; Google Finance is as good as any, and Google News alerts are great for keeping you apprised about events that affect your assets.
ALWAYS multiple stocks. You never want to have all (or most) of your eggs in one basket - you never know what could happen. Even the most rock-solid companies are vulnerable to unforeseen events.
I wouldn't recommend it to everyone, but I NEVER invest in mutual funds. Why would I give a bunch of worthless fund managers a cut of my hard-earned money just so they can get fat, usually while only performing as well as the market? If you insist on giving your money away to fund managers, BlackRock is my favorite.
As to other securities and investment vehicles, it depends on what your goals are. Most people want to have at least some cash, as well as some bonds or "bond replacement" stocks (utilities like ConEd are really good in this regard). If you're a really young guy, you want to have more in the way of stocks/equities, because those will perform the best over the long run. However, they're also the most volatile, so as you get older, you want to shift more into bonds. Oh and if you don't know, the difference is that when you're buying bonds, you're buying a company's debt; stock is equity, which entitles you to a share of its profits. Needless to say, debts are paid first, and if there's any earnings left over that aren't retained, that's the dividend payed to holders of common stock.
I know that's a lot of stuff, but if I can clarify anything, just ask.
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It's just going to be a learning experience for you. This group is more for long term planning, see misc.invest.stocks for more ideas.
There are many books out on how to find the best stocks. Pick a company in an industry you understand.
You current investment portfolio isn't large enough for multiple stocks. We all would be happy with a gain of $200 on an investment of $1,000. If you have credit card debt, paying that off would probably be a better investment.
I own a stock KG (King pharmaceuticals that currently sells for $9.70 and you could buy a 100 shares of that. Having done that you could sell 1 January ($10.00 strike) call against that stock for $1.00 which would give you $100 minus commissions.
No. You won't get anything close to the return you want.
-- Ron
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If $1k is a sizable sum, why would you risk throwing it away doing something where you have no knowledge and no expertise? That isn't an investment, it's gambling.
Most investors start with mutual funds rather than individual stocks. And frankly most should never bother with individual stocks, because most people don't seem to be very good at picking them, don't take the time to learn how to do it effectively, and don't keep an eye on whether their stock picks are actually any good.
Suggestion: it doesn't take "live money" to learn about stock picking. Read up on it, learn as much as you can about it, and create an imaginary portfolio with $10,000 - document all the trades you "would have made." Alongside that, keep track of how that $10k would have done in a comparable mutual fund that you could buy and forget about. Maybe you'll find that your picks would have done well, and you'll be comfortable doing it with real money (and have more than $1k saved up by then). Or, you'll find that the mutual fund would have been worth $12k while your fantasy-stock-picking left you with $9k and you say "well glad I tried it with play money first."
-Tad
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It's still investing. Picking a stock at random does better than many other schemes.
It takes more skill to pick mutual funds than to pick stocks. At $1,000 the OP can't get into a mutual fund anyway, but he could by an ETF.
-- Ron
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Picking a *portfolio* at random with a certain minimum number of stocks - you can then embrace market risk (and returns) and hopefully get rid of most of the idiosyncratic risk. The more stocks you randomly pick, the more likely you'll get rid of the idiosyncratic risk.
Picking a single stock at random and being done is a *horrible* strategy. It's got the same expected return as the market, but the total risk - systematic and idiosyncratic combined - is off the charts.
Really? Almost any single randomly chosen diversified equity fund will have a slightly lower expected return, but vastly lower volatility than any single randomly chosen stock.
It may take more skill (if it's even possible) to choose one which is likely to beat the market, but almost none at all to pick one which is likely to be less risky than any single (or even few) individual stocks.
Which is what I recommended earlier, though there are, in fact, some excellent regular no-load funds he could get for $1000. (5 min. with M*'s fund screener will find you plenty, a couple of which I wouldn't hesitate to suggest as one-stop shopping like Vanguard STAR, though that's probably a bit conservative for a long term, risk-tolerant investor).
Product portfolio and even financial results reflect only so much on a company's stock price. The perception by the market and it's own assesment of its products distort its effective stock price. In other words, the market may look at a company or even at a whole industry through hype. For example, .com start-ups a decade ago, real-state more recently, etc.
At least that's the conclusion that I came up to after trying to focus on companies in the industry that I've been working at for the last three decades.
In the end, I've never done better than using the dart-board method of investing in ETFs: just pick a number for a fund type, then pick the one with the lowes costs and a reasonable trade volume, so that I don't have to wait a whole day, along with its fluctuations, trying to buy or sell it.
HTH
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I would say that the trade price is important. I try to keep the trading costs (the commissions charged for buying and for selling the stock) below 1% of the capital I invest in the stock. For E*Trade, at $11 per trade, I buy at least $2000 worth of a stock. At Trade King, I'd be able to invest in a stock with about $1000 of capital.
BTW, in my experience, even though TD Ameritrade has a better website than ET, come tax-time and the documentation provided by ET is not only flawless, but also quite comprehensive. TDA has sent me 2 or 3 corrections up until the last week to file, and I've always had to log online to find the missing information from their paperwork (such as the purchase price to calculate the basis).
So, there's indeed more to a discount brokerage than merely its trade commission.
HTH
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