I am 18 years old and know nothing about stocks, mutual funds, etc. I live at home and have no real living expenses, so I want to take advantage of this and start investing early. I’m wondering how I can start putting my money to work for me. What are the first steps I should take? What accounts should I open? How can I invest in stocks without a 401k?
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March 9th, 2010 at 3:13 am
Normally, anyone wanting to invest in stocks is advised to have approximately 3-6 months worth of salary stored in cash in case the investments do poorly.
As for investing, you should first consider your time horizon. Also, you should consider how often you intend to make trades. There are two kinds of stock brokers: discount and full-service. Discount brokers charge low commissions but you are completely on your own when it comes to making specific investment decisions. Your broker will be of no help, as should be expected in exchange for paying less money for trades. Full-service brokers charge much higher fees (the fees can run into the hundreds of dollars) for each trade, but they will provide useful investment advice.
Discount brokers are best recommended for those investors who intend to make relatively frequent trades and/or the total value of their investments is small (i. e. a few hundreds of dollars). Full-service brokers are recommended for those investors who do not intend to make frequent trades and/or the value of their account is large (i. e. tens of thousands of dollars). Let me warn you that if you are intending to invest for retirement, do not go through a discount broker. Retirement is too important to you to simply skimp on fees and miss out on valuable investment advice in the process. There are a number of discount brokers such as Scottrade, eTrade, Ameritrade, Charles Schwab, and Sharebuilder among others.
After selecting a broker, you should read a few investment books. I have read the following books:
“A Random Walk Down Wall Street” – Burton Malkiel
“The Intelligent Investor” – Benjamin Graham
Obviously, you will be subject to taxes on your investments. In general, the short-term capital gains tax rate is higher than the long-term capital gains tax. A short-term gain is defined as a gain earned on a position held for less than one year. Any position held longer than that qualifies as a long-term gain. It is in your best interests to not make frequent trades as the tax implications are smaller.
I will end with a small caveat. I am an investor myself and I can understand how it feels to see the value of an investment plummet. I have been through this. However, the answer is not to panic and make hasty decisions. Sometimes, it’s better to ride out the tough times.
March 9th, 2010 at 4:12 am
The first obvious thing is to get familiar with the stock market that means reading a lot and doing your research in all companies that you want to invest in. Open an online bank account and an online broker like ETRADE.
This should get you started but remember to do you home work and don’t invest money you will need or cant afford to loose. Otherwise good luck , it will be challenging but not impossible.
March 9th, 2010 at 5:10 am
First of all, I’d like to commend you for thinking about your future at such a young age.
The short answer is don’t actively invest – just buy a broad, low-fee index fund (http://en. wikipedia. org/wiki/Index_fund). If you really want to actively trade – and again, I would not recommend this, certainly not without some serious training – I would highly recommend opening an account at WeSeed (http://www. weseed. com/). WeSeed is a portal designed to help people learn about the markets.
Why should you not actively invest? Individual investors (on the average) typically make very poor investment decisions (see the jstor source for more information). Markets are essentially a way to aggregate information and all public information is [theoretically and usually - there are some relatively rare anomalies] in the market price. Basically, unless you know something that everyone else doesn’t know, you’re just gambling by buying random stocks (which is what a lot of individual investors do). So what should an individual investor do?
Diversification (you probably have heard this millions of times before) is really important. I would recommend investing in broad index funds (S&P 500, Wilshire 5000, etc. ) if you can. The guy who invests all his money Wal-Mart stock takes on a lot of risk compared to the guy who invests in the 500 companies that make up the S&P 500 (which includes Wal-Mart). The guy who invests 100% in Wal-Mart takes on what is called “idiosyncratic risk” or “diversifiable risk” (http://en. wikipedia. org/wiki/Systematic_risk) which basically means that he has put all his eggs in one basket (which is not smart unless he’s got some kind of edge/private information about Wal-Mart). The guy who invests in the S&P500 essentially puts 1 egg into 500 different baskets and takes on “systematic risk” or risk of the entire market (again http://en. wikipedia. org/wiki/Systematic_risk).
If you really think you can outperform the market, then I’d recommend learning as much as you can by visiting WeSeed, going to school, and/or talking to/networking with traders.
If you want to be “smarter” with your money, I’d open an account at Vanguard (or another low cost broker). You’ll want to find broad funds that have low fees – then sit back and watch your wealth grow. I have an MBA in Finance from the University of Chicago Booth School of Business (a [by some measures THE] top school for economics and finance), and I personally would never actively trade.
You should make your own decision, of course, but be sure that decision is informed.
Good luck!