Making a small investment


R

richard.blankman

Hello,

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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J

John A. Weeks III

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.
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.

-john-

--
======================================================================
John A. Weeks III           612-720-2854            (e-mail address removed)
Newave Communications                         http://www.johnweeks.com
======================================================================

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D

Default User

Hello,

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.

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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W

Will Trice

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 how I started trading individual stocks, and I started with
E-Trade as well. They've worked well for me over the years.
- What's the best place to find ideas for what stock to invest in?
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.
- 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?
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.
- Is there a better option (mutual fund/bonds/etc.) that I should be
considering?
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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T

Tyler Brown

Hello,

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.
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.
This is a sizable sum for me, but it would not be the end of the world
if I end up at a loss.
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.
- What's the best place to find ideas for what stock to invest in?
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.
- 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?
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.
- Is there a better option (mutual fund/bonds/etc.) that I should be
considering?
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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B

BreadWithSpam

Tyler Brown said:
First off, ETrade is a terrible site to use. I use TradeKing.com, it's
only half the commission.
FWIW, I've had no problems at all at ETrade. I prefer Fidelity,
generally, but ETrade's been perfectly fine. TradeKing got
great reviews in a magazine recently, but if the only thing
you like better about it is the commission, you're probably
trading too much. Low commissions are important, but they
have very very little impact unless you pay them...

[snip - some excellent guidelines about picking stocks]
- Do an hour of homework a week for each stock that you own.
Which means that actively managing a diversified portfolio
is damn near a full-time job. Most folks have better things
to do with their time, and I hope that the Original Poster's
$1000 is just play money and that he has the vast bulk of
his long-term savings being managed in a well diversified
mutual fund portfolio.
when I tried to get them to pony up some cash to short Lehman with me
Shorting stocks is an especially risky thing to do. Even Lehman.
It has potentially infinite downside and only limited upside,
and is never a long-term proposition. Not that I expect the
original poster to mess with this, but it's certainly not something
for a beginning investor to consider at all. Unless your friends
to whom you suggested this are pros or experts, they were
pretty smart to ignore that advice.
- 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?
We've discussed this here in MIF-P many times. You need an
emergency fund even if you are carrying debt at high rates.
Paying off that debt and pretending that some available
credit qualifies as an emergency fund is misguided -
"available credit" can go away in a heartbeat. Ask the folks
whose credit cards are frozen or even whose home equity lines
are frozen. The time when you might most need that emergency
money could well be the same time that your credit gets
frozen. Have at least a couple of months of liquid savings.
Then pay off credit card debt as quickly as possible. *Then*
do the rest of the investing. In the meantime, if your
credit card rates are high - talk to your banks and see
if you can renegotiate them - tell the bank you've got an
offer from another bank to roll over your credit card
debt at a lower rate and you're considering that. Banks
would often rather keep you at a lower rate than lose
a steady debt-payer.

[For a $1000 investment]

If it's an *investment* - yes. It may be too little for
most of the better mutual funds, but it's plenty to get
yourself a stake in an excellent ETF.

You can't build a diversified portfolio of individual
stocks with that little money.
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.
There are a few fund managers who add plenty of value,
doing things that individuals don't have the time or
training to do. And for the rest of the asset classes,
there are ultra-low-cost index funds and ETFs. Some
people have other things to do besides manage their
stock portfolios. If you *enjoy* managing it, give
it a shot. The odds that an individual is going to
manage it any better than an index or a well-managed
low-cost fund are very small. Just as those same
odds are amongst pros - most of whom also fail to
beat the indices.

For most people, the best use of their time and attention
is not stock picking, but rather, asset allocation and
spending less then they earn. By a long long shot.


--
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R

Ron Peterson

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.
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.
- What's the best place to find ideas for what stock to invest in?
There are many books out on how to find the best stocks. Pick a
company in an industry you understand.
- 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?
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.
- Is there a better option (mutual fund/bonds/etc.) that I should be
considering?
No. You won't get anything close to the return you want.

--
Ron

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T

Tad Borek

I am COMPLETELY new to the world of investing
I placed $1,000 into an etrade.com account
This is a sizable sum for me
I want to make a risky short-term investment in
a stock and am a bit overwhelmed by the amount of options.

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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R

Ron Peterson

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.
It's still investing. Picking a stock at random does better than many
other schemes.
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.
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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W

Will Trice

Tad said:
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."
An excellent suggestion (as were the others that I snipped). This is
something that I did before committing real money to individual issues.
Two important things I would note:

First, it's easy to cheat yourself. If you decide on Thursday that you
really meant to buy/sell an issue on Monday, tough. It doesn't count
unless you wrote it down on Monday.

Second, if/when you decide to move to real money, the trades become a
lot more emotional. Ever played poker for matchsticks (or these days
online with a practice account)? It's a lot different than playing even
nickel-dime-quarter. That will be your biggest challenge when you move
to real money - removing the emotion.

Still, paper trading is a great idea.

-Will

william dot trice at ngc dot com

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B

BreadWithSpam

Ron Peterson said:
It's still investing. Picking a stock at random does better than
many other schemes.
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.
It takes more skill to pick mutual funds than to pick stocks. At
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.
$1,000 the OP can't get into a mutual fund anyway, but he could by
an ETF.
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).



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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A

Augustine

There are many books out on how to find the best stocks. Pick a
company in an industry you understand.
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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A

Augustine

FWIW, I've had no problems at all at ETrade.  I prefer Fidelity,
generally, but ETrade's been perfectly fine.  TradeKing got
great reviews in a magazine recently, but if the only thing
you like better about it is the commission, you're probably
trading too much.  Low commissions are important, but they
have very very little impact unless you pay them...
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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