It seems so tempting to invest online -- buying and selling stocks through a self-managed online account. Lower fees, no meetings with planners, and the satisfaction when you hit it big: sounds great! And it can be, but only if you know what you’re doing.
“For a beginner to invest without knowledge is like gambling,” says Ruth Hayden, a Certified Financial Planner in St. Paul, Minnesota. “You might as well take your chances with a slot machine.” For that reason, only a professional should manage your retirement investment. But if you already have 100K working for you and the 401(k) contributions are maxed out, here’s how to whet your online whistle.
Pick a trader, any trader
Check out barrons.com for its annual review of online investing companies and see which ones score the highest. Big, reputable brokerages like etrade.com, tdameritrade.com, and scottrade.com all have similar tools and fee structures, so go with whatever site offers the best interface for you. After opening an account (try to start with at least $1,000), read the FAQs, experiment with all the site’s research tools, and call the customer service center and pester them with your remaining questions.
Educate yourself
Amateur investors shouldn't buy stocks off the bat. Subscribe to The Wall Street Journal or Investor’s Business Daily online and read them every morning -- you know, when you’re drinking coffee and putting off getting to work. Then pick up a copy of The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor and tune into Jim Cramer’s Mad Money to learn as much as possible about intelligent investing.
Play it safe
Your first buy? “A mutual fund, like a balance fund that diversifies your assets between big, medium, and small cap investments,” suggests Hayden. Mutual funds are not as volatile securities, so they hedge against the potential losses of your individual stock picks. Once you’ve identified a good no-load mutual fund (you can’t go wrong with a highly-rated S&P index fund), take the plunge and buy in. If you have only $1,000, consider spending $500. If you have $5,000, then you’ll want to invest $2,500 in one or two mutual funds.
Buy a stock
Next, identify three or five stocks that interest you -- Ford (F), Rite Aid (RAD), Revlon (REV), Target (TGT), whatever -- and diligently follow them for a month. Use your site’s tools to read up on their projected earnings, their executives, and how their stock is rated by big-name brokerages like JPMorgan and Goldman Sachs. Once satisfied (and excited) by a stock, go ahead and buy it. In general, you’ll want to buy into a company where you can obtain at least 100 shares. The reason: If you were to spend your $500 on a stock like Google (GOOG) that trades for about $500 a share, you’d only make $1 (or a 1 percent return) for every dollar the stock increased in value. Conversely, if you bought 100 shares of a $5 stock, you’d make $100 (or a 20 percent return) if the stock price increased by $1. (Warning: Buying a stock under $2 is generally considered risky.)
Once you buy, let ‘er ride. If a stock starts to plummet, you’ll have to decide when to cut your losses. And when a stock soars, be sure to cash them in (or at least a portion) to secure some profit. Because as the old saying goes, bears make money, bulls make money, but pigs get nothing. Oink, oink!
by Alonna Friedman
7/1/08
See more:
investing,
Money