It's time to answer some viewer mail:
Hello Eric,
I understand that you are not available for "free" consulting and can't spend
hours doing so. Having said that I do read your blog and appreciate your posts.
As a newbie who has under 10K to start investing in stocks, bonds, whatever you
suggest... I do watch Jim Cramer and I am about to open up a trader's account.
As I figured out so far ... with little money, do not buy stocks that are over
$50/share because even if they boom, the return will be little due to low number
of shares purchased.
I am currently watching stocks such as AUO, ERTS, GME, and RUTH. FedEx and SHLD
would be great to invest in, but too rich for my blood. How about DELL?
All time low now. Being a marketing manager my self, I think they will bounce
back. Any advise ... and believe me ... any advise would be much
appreciated. I am planning on using ShareBuilder.
Thank you.
Igor
Hi Igor-
Thanks for your email. First of all congratulations on making the decision to
invest the $10,000 instead of buying a new plasma TV and a trip to Las Vegas!
My advice depends a lot upon what your goals are. I'm guessing you
probably fit one of the following three profiles:
- Active Trader: You are planning on watching the market every day, and
actively trading.
- Weekend Warrior: You're going to take an active interest in researching
the things you invest in, and staying on top of the market news, but you
don't have time to respond to market moves and news every day (I put myself
in this category).
- Buy and Hold Investor: You want simple strategy like "dogs
of the Dow" (bad idea), that you only have to look at once or twice a
year.
If you are planning to be an Active Trader, transaction fees could eat you
alive with only $10,000 to invest. Note that most online brokerages charge
you a fixed transaction fee no matter how big your order is. For example
ShareBuilder is going to charge you $15.95 for a market order. That means
that if you are paying them $31.90 for a round trip (buying and then selling a
stock). Let's do a little sample math:
- You buy 100 shares of XYZ at $5.00 per share today, it goes up 10% over
some period of time, and you sell 100 shares at $5.50. You just made
$50 - $31.90 = $18.10. Your "10%" gain, was really a 3.6% gain. Ouch!
- By contrast I make the same trades, but buy and sell 1,000 shares and only get
charged $9.99 per trade by my broker. My net return is 9.6%.
And we haven't even started talking about taxes yet...
Does this mean you shouldn't actively trade $10,000 dollars? Not
necessarily, but you have to recognize how much impact transaction fees are
going to have on your returns, and so you should probably stick to a small
number of stocks in you portfolio and larger transaction sizes (as a percentage
of your total portfolio).
If you are going to be a Weekend Warrior, but sure to learn about "stop loss"
orders (I've previously written about "trailing stops" which are a happy thing,
if your broker supports them.) I would also take some time to learn about
Exchange Traded Funds (ETFs).
Based on your email I'm pretty sure you won't be a "Buy and Hold" investor,
but if you were, I would steer you towards mutual funds and ETFs exclusively (no
individual stocks).
A note on ShareBuilder: I wasn't previously familiar with this company
but here are a couple of thoughts:
- Their transaction costs seem high compared to other online brokers.
The monthly subscription fees in particular would add up pretty fast.
- They offer an interesting option to let you make automatic monthly
investments, but they are going to charge you for every transaction...
bleeding you to death. By contrast many mutual fund companies will let
you make monthly contributions for free (keep in mind that the mutual funds
are also collect fees, but only as a percentage of you total holdings, not
for each transaction!)
I'm starting to drone on, but I hope you find some of this helpful.
Good luck.
-EAB