I’m thinking of buying stock in a company. The only thing is: I know nothing about the stock market, and I don’t know if buying stock is right for me. I don’t know if I live below the poverty line or not, but I’m not rich, I’m not middle class. I work. I pay my bills. I have money left over. I figure if I can take that money and invest it somewhere, great.
I just need to know how it works and whether I should bother.
Talk to your bank. They probably have people who can help you out.
If you know little about the stock market, and more importantly realize that you know little about it, you probably want to go with an index mutual fund. A mutual fund is basically a basket of a whole bunch of stocks, and an index fund is one that’s specifically designed to do neither better nor worse than the market as a whole. The biggest advantage to them is that they don’t need active management: A lot of funds have some bigshot professional managing it and trying to outguess the market, buying the things that he thinks are going to go up and selling the things that are going to go down. But the evidence is that most fund managers aren’t any better at guessing this than anyone else, and their salary comes out of your profits.
Why “a” company?
If you’re inexperienced, buy something like shares in an S&P 500 Index mutual fund, and you can have a diversified investment that will generally track the market’s performance:
https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT
(Of course you can still lose money, if you end up buying when the market is up and selling when it is down.)
Before you think about investing in equities, ask yourself these questions:
Have you contributed the maximum possible amount to your retirement plan or pension? If no, can you contribute more? If you haven’t contributed anything, find out what you need to do to start.
Do you have a cash emergency fund, which can cover your normal expenses for at least six months (preferably a year)? If not, can you reduce your expenses or pick up extra work in order to build your fund?
Do you have any outstanding debt like credit cards or a car loan? If so, do you have plans for paying them off, and have you calculated how much it will take per month to pay them off as soon as possible? If you have a mortgage, is it a low fixed rate or is there a surprise coming up?
If you can answer these (you may need to do some research on some of them) then I can give you some reasonable answers about whether or not you should be buying stock.
Buying stock in one company is kinda risky. If the stock rises, you make money. If the stock drops, you lose money.
For example, if you bought stock in Blockbuster Inc (the Blockbuster Video company) back in 2000, that would have seemed like it was a relatively low-risk stock. The company was doing well. Video stores were everywhere. The stock was selling for about 15 cents a share. So, let’s say you put in 150 bucks (that will make the math easy). In 2002, the stock rose to about 25 cents a share, so your $150 was now worth $250. Yippee! (minus trading fees and whatever).
In 2004, the shares dropped to about 20 cents per share, so now your stocks are worth $200. Do you sell, or do you hang on to them and hope that they go up again? They’ve already been up above 25 once. So let’s take a gamble and say they’ll go up again.
They don’t. In 2006, they are down to about 5 to 7 cents per share, which means your $150 investment is now worth about 70 bucks tops on a good day. But they are a big company. You think maybe they’ll turn things around so that you’ll at least get your $150 back. They don’t. The stock continues to drop, and in 2010 they file for bankruptcy. Chances are you don’t let the stock drop all the way to zero. Once your $150 dwindles down to about $20 or so it’s clear that they aren’t going to recover. You cash out and take your loss so that you at least get to keep that $20.
On the other hand, if you had purchased Microsoft stock back in the early 90s, you’d be doing pretty well right now.
In order to reduce the risk of things like this, a lot of people invest in funds. There are a bizillion different types of funds, but basically each fund has a combination of stocks, and sometimes that combination changes over time as the fund manager decides that some stocks are either losing money or are becoming too risky, or other stocks start to become more attractive. Since the funds are made up of multiple stocks, if one individual stock tanks, it doesn’t hurt your overall investment too much. On the other hand, if the entire economy tanks a bit, you can lose quite a bit of money in funds as well. My mother lost about half of her retirement fund when the economy decided to take a dump.
If you are young, higher risk funds tend to make more money, but they are also the most at risk for losing money. Lower risk funds don’t make as much, but are less likely to drop if the economy goes south for a bit. Generally, what a lot of folks recommend is going with the higher risk funds when you are younger and can afford the loss, but switch to less risky funds when you are getting closer to retirement so that you don’t risk a major loss like what happened with my mother.
You don’t have to have a lot of money to invest in these types of funds.
If you are a person who doesn’t have a freaking clue about stocks (like me) then let someone like Vanguard tell you what funds are best for you based on your overall investment strategy.
If you have car loans or a house mortgage, there’s a very good chance that any money you invested wouldn’t yield a greater return than the amount of interest you are paying on this debt. You’ll end up in a better place financially if you pay off your debts earlier. Just be careful. Some people pay off their car loan early and then decide that they can afford a better car. They end up spending a LOT more money than they would have if they hadn’t paid off the car. Control your spending, and keep some money set aside for emergencies.
Vanguard Mutual Fund Profile | Vanguard Wouldn’t be a bad start.
Even if you believe you’ll outperform an index or a fund manager, there are good reasons why a small investor should prefer the simplicity of a fund.
As a small investor there are various annoyances that may eat into your tiny financial win. Class actions by stockholders against the company they bought are surprisingly common. :eek: Not only will you need to cash the tiny check that eventually shows up, you’ll have to mail in a signed waiver months earlier. The broker’s fees themselves are much higher than a fund manager pays, on a proportional basis. And spin-offs are another annoyance. I once owned 150 shares of Campbell Soup and ended up getting a dividend of 12 shares of Vlasic Pickle. :smack: (There’s oftion an option where you can unload such a tiny lot without paying commission, but you have to act quickly — what if you’re on vacation when the mail comes?)
Some amateurs study a lot and do well. But for most small investors the only good reason to pick your own stocks is if you find it an entertaining hobby — but be aware it may be an expensive hobby.
Probably, but that help may be expensive. Bank of America, for example, occasionally tries to sell me a Merrill Lynch advisor. That advisor would probably take about a percent per year of my account in fees. That 1% drag compounds over time to a surprising amount of money.
Like everyone else said, this is good advice. Individual investors in the stock market are almost always best served by a low-cost index fund.
I strongly recommend https://www.bogleheads.org/. Posters there tend to be much higher-net-worth than the OP; but there’s no reason to be intimidated, and they offer sound advice for accounts of all sizes.
There’s an old poker adage: don’t play with scared money. In other words, if you can’t afford to lose it, don’t risk it. You would be well advised to heed the advice on index funds.
If you want to end up a millionaire in the stock market, then start out with several million.
Also - your first step should be opening a Roth IRA.
Maybe. If the OP still has credit card or other revolving debt, or doesn’t have an emergency fund, the first step might be to deal with that. We don’t know enough about the OP’s finances to say anything for sure.
I believe this is the best advice to start … especially #1 and #2 … also (and if you don’t mind) let us know your age. It’s important to know how many working years you have left in order to properly assess your proper exposure to risk of default. I honestly think my mum have investments in the stock market after she retired just so she’d have something to complain about, those investments weren’t the wisest as could be had for her.
I teach this so let me see if I can help you out.
I disagree with Chronos’ advise about talking to a bank. Almost all of them will want you to buy their products which are coincidently perfect for you no matter your situation.
The retirement plan is a good one but it depends on your options. My school district only offers variable annuities through life insurance companies for their plans. These are notoriously bad retirement investments. Luckily I works a second job that has some nice funds in their 401k plan through Fidelity. A 401k/403b gets you a little bit of free money but again you are locked into your companies choices. An IRA/Roth IRA gives you more flexability and the difference is when you pay your taxes. Munch’s advice on opening a Roth IRA may not apply to you because of your current and future retirement/tax situation and because it also locks up your money to retirement age.
What are your goals with this plan? Looking through the thread I don’t think anyone asked that. Is it to save money for retirement? If so what is your age? You just want to play in the stock market? You are hoping to hit the next great stock and turn your $200 into a million? Make some money to help out on your next vacation? I’d be really worried with any advice in this thread if we don’t know your desired outcome.
For example, the advice on buying an S&P index fund (called a spider). Great advice to always bet on the economy BUT it is a buy, hold and forget it sort of investment. If I were in my 20’s it would form the backbone of my retirement plan. But you certainly don’t “play” the market with these funds and if you are older you may want to opt more for growth stocks. And of course there are value stocks that are more risk/reward options.
But funds are not a bad thing and you can still play. If you think gas and energy production is due for a boom, buy an energy stock fund. When gold/platinum is in the $400s/oz buy a mining stock fund. You think Africa will be the next huge growth market then look for a fund that focuses on there.
As others point out, you need to review your complete financial situation. Let us assume you do so, and conclude that you will invest $X in sound U.S. stocks.
I’ll play ‘devil’s advocate’ and describe an alternative to buying an index fund that may work out better for many. First let me explain a potential pitfall in the Buy and Hold Index Plan.
The pitfall is that you may change your mind and NOT hold. Suppose you buy your spiders, and the Index starts falling and falling. You read the blogs and papers and conclude that foolish you bought at the peak. You may feel tempted to sell your spiders, which include cyclic stocks like banks, machinery, mining, all of which are plunging down as the world seems to be entering recession.
It might be good strategy to sell, at a loss, in this case. Or not — You may just be inadvertantly transposing into the undesirable Buy=High Sell-Low strategy.
This risk is avoided if you simply buy stocks that you won’t want to sell. You can buy funds in specific sectors like Pharma or Consumer, according to your own feelings, or just pick out a few stocks you won’t want to sell: perhaps some low-beta blue chips like Johnson & Johnson (0.56 beta), PepsiCo (0.44 beta), Altria Group (0.43 beta) — these stocks will usually fall less than the average stock during a crash. (Or perhaps it’s Disney, Merck, Monsanto, McDonald’s that inspire long-term confidence in you: You picks stocks you won’t be afraid to hold.)
I’m not claiming that your picks will outperform an index fund, just that confidence in your own hand-picked stocks may help you avoid the frightened Sell-Low trap.
In a previous thread on investing, someone (I can’t remember who) suggested a novel, and perhaps valid, argument against investing in index funds. The idea is that index funds don’t represent the entirety of the market and the popularity of index investing inflates the price of the stocks in the index funds. So instead, the theory went, you should invest in stocks outside the major indices.
Yet another reason not to invest in a single stock is that there are people, aided by computers, who are watching that stock and will react instantly to any new about it. By the time you find out it will be too late. Sure you can buy for the long term, but the day of widow and orphan stocks is long past. Index funds don’t have these problems.
If you talk to someone who sells investment products, they are a sales person looking to sell their product. They don’t necessarily have your best interests in mind. They may recommend products which give them a high commission rather than products which would actually make you the most money in the end.
Does your work offer any sort of retirement 401K plan? A 401k is a special plan where you can put part of your pre-tax salary into the fund and then access when you’re 60. If you have extra money, you’re probably better off directing some of your paycheck to that first rather than getting it in your pocket to invest. From what you said, I’m getting the feeling you may not have any retirement savings put away.
As a beginner investor, your best investment is probably one that invests in the S&P 500. That’s a fund which invests in 500 funds all at the same time. Your investment will typically grow or shrink in line with the stock market as a whole. If you invest in individual stocks, you are very likely to do much worse than if you invested in a S&P500 fund.
You might consider buying only stocks that pay dividends too.
That way you can earn a return without having to sell the stocks. Buying and selling can incur some large charges. Some stocks regularly pay dividends that easily beat a savings account interest rate, without bank fees that eat up the meager rate.
No guarantee that you will always get a dividend or how good it will be. But you still have the stock as well.
Congratulations on living within your means and wanting to save more. Generally, yes, investing carefully in the stock market makes money and for most people, IMHO, it’s probably the best way to invest money that you don’t need for a long time. Basically, the stock market makes money because you are investing in companies who use that money to sell products and services and earn profits. There are years of history to suggest that companies can almost always find new ways to earn profits, so there is reason to expect that investing in the stock market will continue to be profitable in the long run. There will be times when the stock market loses money and you have to be mentally prepared for that and to understand that you shouldn’t sell your investments just because they lost some value.
I agree with the index mutual fund suggestion. I disagree with talking to your bank. They can sell you an index mutual fund but it will likely come with an upfront sales charge (“load”) that will mean you lose money from the first day you invest and it will come with higher annual fees that will cost you money year after year. You can do better.
These are all great priorities, though I think I would put them in reverse order. When you say you are “paying your bills” do you mean that you have no credit card debt? Or does it just mean that you are making the minimum payments on your credit cards? The interest rate on a typical credit card is far greater than rate of growth you can expect by investing in the stock market. You will almost always come out ahead by paying off your credit card debt first.
If you’ve paid off all your credit card debt and your car and mortgage debt are up to date and not very high interest, then having some cash to pay off emergency expenses should be your next priority. It doesn’t make sense to invest in the stock market and then be forced to sell if you need a new transmission or furnace, or to cover day-to-day living expenses if you lose your job.
Finally, if your debt is in good shape and you have an emergency fund, decide what your financial objective is (retirement in 30 years? College education for your kids in ten years? Boat in five years?) and invest accordingly. Since you didn’t say, I’ll assume that you are saving to retire at some point in the future. It’s a good goal for most of us.
This is a really good general purpose index fund. I invest in a very similar fund from Vanguard. However, if you are saving for retirement, you might want to consider the Vanguard Target Retirement funds (Vanguard Target Retirement Funds | Vanguard). Basically, each Target Retirement fund is a simple, diversified portfolio designed to help you meet your retirement goal. You pick a single fund that matches the date when you want to retire. If that date is far away, the fund will be invested largely in stocks, which are expected to generate a better return over a long time. As you approach your retirement date, the portfolio shifts away from stocks and into safer bonds and cash investments because people nearing retirement having less time to make up for losses they might experience in the stock market. It never gets completely out of stocks though. I invest my IRAs for retirement in one of these funds.
This is cynical and wrong. Over the years I have met dozens of people who have become millionaires investing in stock markets. The trick is that they either (1) were professional investors who made their money from fees, or (2) invested carefully over a long period of time and were conscientious about managing their portfolios and minimizing their fees. Since becoming an investment manager isn’t in everyone’s future, most of us have to rely on (2).
I would suggest that if you can invest in a 401(k) plan at work and if that 401(k) plan offers to match a portion of your contributions, your first step should be to invest in the best investments offered by that 401(k). Maybe if we know what those are, we can help you sort through them.
If you don’t have a 401(k) plan with a match from your job, a Roth IRA invested in a Vanguard Target Retirement fund would be a great idea. You can start by investing just a couple thousand dollars to start and then you can set up an automatic investment to some more money every month. It adds up over time.
This is more theoretical than real. (1) Even though this problem was anticipated decades ago, active managers still haven’t been able to use this information to outperform S&P 500 Index funds consistently, and (2) you can invest in funds that do approximate the entire U.S. stock market. The Vanguard Total Stock Market Fund is one such fund. That fund is also a component of the Vanguard Target Retirement Funds I would suggest, which also invest to track foreign stock indexes and bond indexes as appropriate. The thing you’ve identified is a non-issue.
I believe that Voyager is referring to high-frequency traders. High-frequency traders are largely irrelevant to the way you should invest and we could talk more about that if you care.
If your goal is to generate income from your portfolio, dividend-paying stocks are one way to do that. You should still probably invest in a mutual fund that invests in dividend-paying stocks, rather than individual dividend-paying stocks. If that’s what you want, I could suggest the fund I would choose for that purpose. Hint, Vanguard offers it. They generally offer solid, low-cost funds for almost any need or purpose.