Where to start?
This is the looming question that every new investor wants to figure out. The longer you wait the more your anxiety builds up. It is scary to put your money into a company that you don't have direct control over, but not investing at all, will always net you a 0% return.
Here is the bottom line. Not every trade is a good one, and you may very well find yourself with an absolute dud. But you should never, emphasis on never, let it affect your livelihood. Just remember the reason the trade went south and avoid those situations going forward.How much to put in?
Never invest borrowed money. You always hear about really smart investors that make really stupid decisions, because they think they know the market. Don't take a second mortgage. Don't use a cash advance on your credit cards. Don't sacrifice food for stocks.
My list of priorities are as so: living expense, credit cards, short term loans, long term loans, nice to have purchases, 401k up to employer match, 401k yearly max, and then other investing. Money that you have dedicated to investing should only be dedicated to investing.
Where should I open an account?
I recommend using Robinhood for trading individual stocks. It doesn't have all the bells and whistles of other brokerage accounts but having free trades is essential if you are only investing small amounts of money. If you use the free upgrade to Robinhood Instant, you don't have to worry about a three day lag it takes every trade to settle. This means you can invest immediately after you sell your shares.
If you are planning on buying mutual funds, then Fidelity and Vanguard accounts don't have transaction fees for buying funds of that specific family. They have a decent selection of funds that have low expense ratio, but they aren't actively managed.
How active do you want to be?
This is where you need to determine how you want to manage your portfolio. This list is not comprehensive. You can buy options, futures, etfs, etc.
Investors buy stocks and hold onto them for long periods of time. You can try a variety of strategies as a investor. Some buy relatively stable stocks and just collect dividends every quarter. However, the key to this is find companies that you believe are undervalued now, or have the potential for growth over a long period of time. Investors buy in smaller increments and buy more when the stock dips. How do you know if a company is undervalued or has the potential for growth? Read their financials... If you are just starting out try to find as many opinions on the stock and look at the 52 week price targets.
Traders buy larger amounts of stocks and keep it for short amount of times. Theoretically traders should make larger amounts of money, because they are constantly moving money around and mitigate the effects of market fluctuations. My advice for traders is to keep a close watch on a handful of stocks, and buy when it is below a certain threshold, and sell after a certain percentage increase based on your risk tolerance. If you are using a broker with very low fees, you can theoretically sell when the stock goes up a couple cents. Keep in mind there are SEC regulations for day traders.
Lastly, you can buy a funds or bonds. Index funds are extremely low expense ratios and try to match the market. Actively managed funds have load fees and high expense ratios. At this point, most investors will tell you that index funds are superior to actively managed funds, but only time will tell if that continues to be the case.
Last Thoughts
Any gain is a good. If you are outperforming a bank account and inflation, then you shouldn't complain. Don't regret not buying or not selling; commit to every decision. Know when to bail; put a 15% stop loss if you are afraid of something going sour.
Leave a comment below if there is anything I didn't discuss.
Peter
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