The assumption here is that you have a base of liquid savings, generally no credit card debt (pay off each card each month) and a stable base of mutual funds that are doing at least fair for you. Now you feel ready to open a brokerage account and look at buying stocks.
If you are reading this, you’re probably already fairly comfortable with working on the Internet. If you have children who use the same computer that you do, however, I urge you to be extremely paranoid about the security of your computer. A youth will go to a music-sharing site, thinking “Wow- free music”, and wind up with spyware lodging itself on your computer, transmitting keystrokes (like your username and password) back to a Chinese or Ukraine or even American crook specializing in identity theft- and your only clue is a little extra activity by your computer, which may not even be noticeable.
That said, if you practice good Internet hygiene, Internet trading is a fine way to do business.
You can go to a local brokerage (in-town) house, and buy stocks that way. Which stocks? Whatever the broker is pushing that day, if you don’t have other orders for him or her. Will they be good stocks? Surely, for the broker, maybe, for you.
You can go to an on-line brokerage, and there are a number. You see the ads on TV just about every day: Schwab, E-Trade, Fidelity, Vanguard, many others. Look at the commission structure, but remember that under a value approach to stock picking, and with a somewhat limited portfolio, you won’t be doing a lot of buying and selling; a dollar difference in trade commission might only add up to perhaps thirty dollars over a year of modest investing (such as a buy and sell a month, for example). That means you look at other factors as well; where are your mutual fund accounts? What investing information do they seem to offer?
With a brokerage decided upon, which stocks do you want to buy? There are plenty of suggestions in the media; perhaps a department store chain opens a new store near you and you’re impressed. Should you buy that stock? You can see the difficulties of simply choosing which stock to buy.
You need to analyze what you expect to happen with a stock. You may buy a stock expecting its price to go up by a certain percentage by this time next year. You’re looking for growth. You may buy a stock that pays a dividend on a regular basis, so you’re looking for income. Nice if you get both, and nicer if there is also a growth in the dividend. By the way, mutual funds usually simply re-invest dividends so that your number of shares increases. Brokerage accounts usually include a cash account where dividends can build up (usually parked in a money market account earning a little interest of its own) until you hopefully use them to purchase yet more stock, thus building your portfolio over time.
Back to the central problem: which stocks should you buy? It would be nice if there were a pre-screener for you, so that you weren’t simply throwing darts at a newspaper stock listing. Or listening to Mad Money Cramer screaming stock advice at you on one of the cable channels. And there are! Some of the on-line brokerages offer tools that will let you see which stocks have gone up or down in price over some past time periods (remember, Past Performance Does Not…).
Better yet, there are newsletters that build exemplary portfolios, many newsletters claiming their chief writer is a star stock-picker, making huge gains, yada, yada. But some newsletters really are good, and do provide useful advice.
Newsletter portfolios, I believe, are to be tempered by your own judgment. I have one stock that has, over many years, done very well for me, and it is not a part of the portfolio of my favorite newsletter. However, I have bought stocks recommended by the newsletter, after looking at the individual company’s information (about every company has a website with investor information), and seeing what other information I could determine about the industry. I look at the discussion about the company, and see if the writer’s expectations make sense, in light of what else I know about the industry sector, the economy, the world… In other words, even for what you think is good advice, check it out. Do your own due diligence.
One factor I give at least token consideration to is whether a stock I am considering buying is in any of the mutual funds I own. It’s not a major consideration, for my stock portfolio is small enough that one stock price movement (hopefully upward) will have more impact on my stock portfolio, than the same stock movement would have on a mutual fund with far more stocks in it than my own portfolio.
At what point should an individual expect to have to use professional money management for his portfolio? Money management builds in its costs, so it would seem to have to earn more than it costs. Where would that point be? If you have any thoughts on that, register for this site (you will never be spammed from here), and leave your comments.