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This is just a general informative post (first in a series) about how to invest money in the stock market. It's just my way of contributing back to the community. My background: I'm working in the finance industry now and taken a lot of finance classes in college (academic finance is quite useless actually).
Intro
So as TL gets older, graduates college, and gets jobs, there may come a point in your life when you actually have more money than you need. What better to do than invest it?
Lets start with basics: you have to be willing to take some risks. Of course, the more risk, the more reward. Investing takes on many forms: you can put money in a savings account, invest in your friend's business, buy real estate, and so on. I'll be talking about one of the easiest and most common ways -- financial markets. It is extremely important to understand what to expect from your investments, what all your risks are, and the fees and costs that you incur along the way.
For this post, we'll start by answering the question: who should be investing?
Reasons you should invest in financial markets:
- You don't have immediate need for the money. If you're living paycheck to paycheck, it's better to hold off on it until you have a bigger bankroll, as they say in poker. If you have credit card debt, pay that off first. Consider investing if you have money sitting in a checking account that's not earning interest. We're talking about at least $1000 here. Otherwise, fees will take out so much that it's not really worth it.
- You're not afraid of losing some of that money. This is related to the first point. Investing can be extremely risky and it's possible to lose a huge amount of money. If you're easily upset whenever you lose money, then maybe you're better off with just a savings account.
- You have lots of patience. When you invest, you don't really aim to "get rich quick". Investing is something that you do over many years, and you're really in it for the long haul (Even then, it's very possible to lose at the end.) Investing as I'm calling it is very different from day trading.
Reasons you should NOT invest in financial markets:
- You need the money for other stuff. Especially if it's credit card debt, cover all that stuff first.
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that.
- You want to get rich quick. There are these things called casinos and lottery tickets. Best part is that they're legal too.
Picking a broker
Ok, if you've made it this far, then you have several options for how to invest. There are tax considerations and so on, but I have no idea how most of it works, especially overseas. Note that this blog is mainly geared to people living in the US, but the advice should apply elsewhere. Let's just start with opening an account with a brokerage service. Unless you have a boatload of money, the most important thing you should consider is fees. Do your research! For what we're doing here, fees are one of the few things that matter here. The difference between getting charged $20 and $5 per trade really adds up over time. All the other services they offer are pretty irrelevant.
S&P 500
Now that's all set up nice and dandy, we get to decide what to do with that money. Let's start simple. Say if you could only invest in one symbol for the rest of your life, what would it be? It's actually pretty simple: SPY. This fund tracks the S&P 500 index, which is basically a sum of the 500 largest companies in the United States. Want to invest in Google, Microsoft, Apple, Goldman Sachs, Citigroup, Exxon Mobil, Wal-mart, Ford, Disney, etc. etc.? Don't know what company is best to buy? You don't need to. Just buy them together. All of them. Simple as that.
However, don't just take all your life savings and buy as much SPY as you can (well, you could.) You should make your investments consistently. Depending on how much money you save, put in $2000-3000 every year or every 3 months or even every month. Putting in too little at once means fees will eat you up, and putting it in all at once means you have more variance/risk.
In future posts, I'll talk about understanding risks, understanding costs, other investment options, and how to gamble if you're really so inclined.
If you have any questions, feel free to ask.
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I'm just a freshman in college, but I'll be keeping up with this series because I'm somewhat interested in investing and there is no one in my family I can go to to get the basics, so thanks! 
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On November 20 2010 08:12 azndsh wrote:
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that.
Sadly I fall in that category. :/
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On November 20 2010 08:44 Yurie wrote:Show nested quote +On November 20 2010 08:12 azndsh wrote:
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that. Sadly I fall in that category. :/
I would take that investment, If they let me do it as often as I like with no time limit. Statistics say I will be extremely rich very quickly :p
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It would be fun if you could somehow tie this in to starcraft:
If you enjoy fast expanding blindly, or expanding a lot, investing might be for you!
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On November 20 2010 08:44 Yurie wrote:Show nested quote +On November 20 2010 08:12 azndsh wrote:
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that. Sadly I fall in that category. :/
Investing in stocks does not have to be risky!!!! There are always safe options. If you do the research and invest in industries that are traditionally non-risky you'll be fine. For example bank stocks (at least in Canada, not sure about the US) typically rise over time.
Take a look at these 10 year trends of three banks: Bank of Nova Scotia, Royal Bank, and TD:
![[image loading]](http://imgur.com/ROiGp.png)
![[image loading]](http://imgur.com/9kNaz.png)
![[image loading]](http://imgur.com/9Wnmw.png)
Notice a trend? Over 10 years, all three pretty much have continuous growth. Even during the recession that just happened, the stocks bounced back up. You could probably put money into any big Canadian bank and not look at it for 10 years, come back, and you'd have a much larger chunk of money.
I started investing during my internship in December 2008, which was after the economy crashed. When the economy crashes stocks are artificially low, so taking advantage of this info I decided to put money into stocks. I was 100% confident this decision would make me money and there wasn't really any "risk" because I knew the big bank & Oil companies I invested in wouldn't go bankrupt - it was only a matter of time until they came back up. I made $10 000 (over 20% return) during a 9 month period.
Although this example is pretty situational, I just want to show that it's not always a "win lots" or "lose it all" scenario with stocks. It can be a "win" / "win a little less" situation, or a "win now" or " win later" situation. It is only a win or lose it all scenario if you choose so.
Investing, in my opinion, is really really important. Why? Because inflation will always happen. So if your money doesn't grow at the same rate of inflation, it "loses its value'. Also, your money can literally make money for you, and why wouldn't you take advantage of that?
Of course, I am not an expert. I'm sure the OP is though, and I really REALLY recommend people follow this blog, and remove the fear of investment risk from your minds.
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I have a few tips
-Never invest in just 1 stock
-Pick a broad selection of stocks, so you do basically how the market does
-A monkey can do almost as good as a professional, its not that hard. There was a study where they had monkeys pick 20 stocks and the pros pick 20 stocks. The pros won but only by a slight margin.
-Long term thinking. The market has never gone down in a 10 year period
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What would you have to say about real estate investments???
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On November 20 2010 09:56 rally_point wrote:Show nested quote +On November 20 2010 08:44 Yurie wrote:On November 20 2010 08:12 azndsh wrote:
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that. Sadly I fall in that category. :/ Investing in stocks does not have to be risky!!!! There are always safe options. If you do the research and invest in industries that are traditionally non-risky you'll be fine. For example bank stocks (at least in Canada, not sure about the US) typically rise over time. Take a look at these 10 year trends of three banks: Bank of Nova Scotia, Royal Bank, and TD: Notice a trend? Over 10 years, all three pretty much have continuous growth. Even during the recession that just happened, the stocks bounced back up. You could probably put money into any big Canadian bank and not look at it for 10 years, come back, and you'd have a much larger chunk of money. I started investing during my internship in December 2008, which was after the economy crashed. When the economy crashes stocks are artificially low, so taking advantage of this info I decided to put money into stocks. I was 100% confident this decision would make me money and there wasn't really any "risk" because I knew the big bank & Oil companies I invested in wouldn't go bankrupt - it was only a matter of time until they came back up. I made $10 000 (over 20% return) during a 9 month period. Although this example is pretty situational, I just want to show that it's not always a "win lots" or "lose it all" scenario with stocks. It can be a "win" / "win a little less" situation, or a "win now" or " win later" situation. It is only a win or lose it all scenario if you choose so. Investing, in my opinion, is really really important. Why? Because inflation will always happen. So if your money doesn't grow at the same rate of inflation, it "loses its value'. Also, your money can literally make money for you, and why wouldn't you take advantage of that? Of course, I am not an expert. I'm sure the OP is though, and I really REALLY recommend people follow this blog, and remove the fear of investment risk from your minds.
Yeah, this strategy is actually extremely risky. Just because the economy crashes doesn't mean there isn't room for so called "big banks" to drop even more, especially if the fundamentals aren't there. Case in point, Citi was at $30 before the crash, $8 after the crash at Dec. 2008. According to you, there was a 100% chance it would come back up. In 2009, it went down to $2, and is only $4 now. This is "risk free" gain, right?
Investing in financials and O&G are extremely risky now, especially those are the industries that are hit hardest. You have to know that they were a product of irrational exuberance and the so called crash was actually a correction in the market, ie. they weren't supposed to be that high to begin with.
Also, you said you made $10k at 20%, which means you had $50k invested as a college student with little means to earn cash. Either you are exaggerating things greatly, or you are made of money. In any case, I hope you don't mislead TL members. OP has it right, invest in a low cost fund such as the S&P500 at first.
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Calgary25989 Posts
I've just started getting more heavily (a VERY relative term... heavily for me) into investing. Got about a year's salary in 6 funds. And I just bought my first stock (haha)!
I was super excited to read this, but it's really, really basic stuff. Hope you continue on later and get into more advanced / specifics.
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ill agree with the OP that academia is no place for learning crucial investing strategies.
however financial systems and institutions are very complex and misunderstood worlds.
already we have some guy claiming monkeys can outperform pros. this guy is from the careerbuilder superbowl commercials working with those chimps. i'm sure since investing is so easy for fakepromise he has a broker, an audited trading record, and huge returns. tell us more!
think rationally; if you could learn how to become a successful investor off a starcraft forum then don't you think we'd see less team liquid dumpster cats and more team liquid millionaires?
if the op's intent is to merely lay an investing foundation to those with interest; then so be it. but information from someone who dabbled in a few classes and allegedly works in the industry is a sure way to lose. sorry if i've blown over your thread's scope. if you want to only explain basic finance 101 topics and give zero investing advice, then excuse me.
generally speaking, the ones who have the most to say about how or what to invest in are the ones who tend to know the least. countless times i've told people i'm a private detective than unveil my real income-generating profession. if you're a trader you know the feeling. as my boss (who was a propriety bond trader for 20 years in chicago) tells us at the fund, the real investor points the student in the right direction, the fake one tries to give him the answers.
however i don't want to make this an entire flame post. if you want a basic finance introduction, go read about statistics and normal distributions in a financial light. maybe even reminiscences of a stock operator if you're feeling spunky. if you want to make money with your starcraft tournament winnings, quit starcraft and dedicate time to the profession or hand it over to a professional. deal with the fees or spend the time, theres no shortcuts. most men who made their bones in the markets had tremendous work ethic and thirst. enormous time was allotted to research and screen time that there is no substitute for.
pzoutseacrest
cred:
b.s. in finance
financial system analyst for an 2-year incubator fund (my aforementioned boss's)
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On November 20 2010 10:36 kakaman wrote:Show nested quote +On November 20 2010 09:56 rally_point wrote:On November 20 2010 08:44 Yurie wrote:On November 20 2010 08:12 azndsh wrote:
- You really don't like risks. Here's an example: Suppose someone offers you a coin flip with a fair coin. If you win, you get $25. If you lose, you lose $20. Would you take it? If you answered no, then investing may not be for you. The daily swings in your account could easily be several times that. Sadly I fall in that category. :/ Investing in stocks does not have to be risky!!!! There are always safe options. If you do the research and invest in industries that are traditionally non-risky you'll be fine. For example bank stocks (at least in Canada, not sure about the US) typically rise over time. Take a look at these 10 year trends of three banks: Bank of Nova Scotia, Royal Bank, and TD: Notice a trend? Over 10 years, all three pretty much have continuous growth. Even during the recession that just happened, the stocks bounced back up. You could probably put money into any big Canadian bank and not look at it for 10 years, come back, and you'd have a much larger chunk of money. I started investing during my internship in December 2008, which was after the economy crashed. When the economy crashes stocks are artificially low, so taking advantage of this info I decided to put money into stocks. I was 100% confident this decision would make me money and there wasn't really any "risk" because I knew the big bank & Oil companies I invested in wouldn't go bankrupt - it was only a matter of time until they came back up. I made $10 000 (over 20% return) during a 9 month period. Although this example is pretty situational, I just want to show that it's not always a "win lots" or "lose it all" scenario with stocks. It can be a "win" / "win a little less" situation, or a "win now" or " win later" situation. It is only a win or lose it all scenario if you choose so. Investing, in my opinion, is really really important. Why? Because inflation will always happen. So if your money doesn't grow at the same rate of inflation, it "loses its value'. Also, your money can literally make money for you, and why wouldn't you take advantage of that? Of course, I am not an expert. I'm sure the OP is though, and I really REALLY recommend people follow this blog, and remove the fear of investment risk from your minds. Yeah, this strategy is actually extremely risky. Just because the economy crashes doesn't mean there isn't room for so called "big banks" to drop even more, especially if the fundamentals aren't there. Case in point, Citi was at $30 before the crash, $8 after the crash at Dec. 2008. According to you, there was a 100% chance it would come back up. In 2009, it went down to $2, and is only $4 now. This is "risk free" gain, right? Investing in financials and O&G are extremely risky now, especially those are the industries that are hit hardest. You have to know that they were a product of irrational exuberance and the so called crash was actually a correction in the market, ie. they weren't supposed to be that high to begin with. Also, you said you made $10k at 20%, which means you had $50k invested as a college student with little means to earn cash. Either you are exaggerating things greatly, or you are made of money. In any case, I hope you don't mislead TL members. OP has it right, invest in a low cost fund such as the S&P500 at first.
My example was for large Canadian based banks - I don't think Citi fits into that category. My example isn't perfect, I was trying to find something that showed steady gradual growth and banks were the first thing that popped into my mind. No, past trends do not necessarily predict future trends. You're right - large companies can continue to drop after a recession, and big companies aren't guaranteed to bounce back. Yes I realize that the oil prices (and thus oil stocks) were higher than what it should have been prior to the crash. You're right I should have been more cautious and critical with my example, and nothing can really be 'risk free'.
However, just like how the oil price wasn't supposed to be that high prior to the crash, I knew that it wasn't supposed to be that low at the time I decided to invest. That was the reasoning I used and it paid out. To me it wasn't gambling at all.
No, I am not exaggerating about my 20% return / $10k profit (note that the recession definitely played a role in those results). All of my money is self-earned. I was an engineering student doing an internship and instead of buying a car or spending money on things I didn't need I chose to invest. When I started my internship I had less than 500$ in my bank account.
Maybe you're right - that banks and OG companies are not the safest to invest in. I certainly didn't mean to mislead TL members into blindly investing - research and patience are key. I am definitely not an expert in this field.
All I'm really trying to say is that stocks are not as big of a gamble as some people think, and all I'm trying to do is encourage people learn about investing.
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On November 20 2010 09:56 rally_point wrote:
Okay, pretend this is 2008. Give me a list of countries whose banks you were 100% sure were not going to fail and would be willing to bet huge amounts of money on. How are you so incredibly sure that Canada wasn't a lucky guess? How many major financial institutions have failed/how many countries have been bailed out? Iceland, Greece, Ireland, US finance industry, US auto industry, etc. etc. How are so sure Canada couldn't have been on that list?
Put it another way, If you were 100% certain, why didn't you ask money from every single one of your friends and use it to buy Canadian oil/banks and take 20% of the profits? Why didn't every hedge fund in the world do that?
You cannot possibly claim that there's no "risk". You became interested in finance when the market was at it's lowest. Anybody who got that lucky with timing would have made money. Sorry if I come off as really harsh, but it's really naive to attribute 100% certainty to anything like that.
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On November 20 2010 09:58 FakePromise wrote:
I have a few tips
-Never invest in just 1 stock
-Pick a broad selection of stocks, so you do basically how the market does
-A monkey can do almost as good as a professional, its not that hard. There was a study where they had monkeys pick 20 stocks and the pros pick 20 stocks. The pros won but only by a slight margin.
-Long term thinking. The market has never gone down in a 10 year period
All except the last statement are true. It's in fact very false. See: 10 years ago to now. S&P 500 was over 1300, and around 1200 currently. That's not even factoring losing to inflation and risk-free rate.
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On November 20 2010 13:30 azndsh wrote:Show nested quote +On November 20 2010 09:58 FakePromise wrote:
I have a few tips
-Never invest in just 1 stock
-Pick a broad selection of stocks, so you do basically how the market does
-A monkey can do almost as good as a professional, its not that hard. There was a study where they had monkeys pick 20 stocks and the pros pick 20 stocks. The pros won but only by a slight margin.
-Long term thinking. The market has never gone down in a 10 year period
All except the last statement are true. It's in fact very false. See: 10 years ago to now. S&P 500 was over 1300, and around 1200 currently. That's not even factoring losing to inflation and risk-free rate.
Look at the Nikkei lol...
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On November 20 2010 13:26 azndsh wrote:Okay, pretend this is 2008. Give me a list of countries whose banks you were 100% sure were not going to fail and would be willing to bet huge amounts of money on. How are you so incredibly sure that Canada wasn't a lucky guess? How many major financial institutions have failed/how many countries have been bailed out? Iceland, Greece, Ireland, US finance industry, US auto industry, etc. etc. How are so sure Canada couldn't have been on that list? Put it another way, If you were 100% certain, why didn't you ask money from every single one of your friends and use it to buy Canadian oil/banks and take 20% of the profits? Why didn't every hedge fund in the world do that? You cannot possibly claim that there's no "risk". You became interested in finance when the market was at it's lowest. Anybody who got that lucky with timing would have made money. Sorry if I come off as really harsh, but it's really naive to attribute 100% certainty to anything like that.
I just wanted to show that some industries are not very volatile, and are safer to invest in. Banks were the first thing that popped into mind, and since the recession was in the graph... I tried to fit it into my discussion. I realized I've made some uneducated and erroneous generalizations and this is my bad.
As for my experience investing - as azndsh stated, my interest in finance was timed with the market being at a low point, and it was easy for me to do well with investing. This is another point I was trying to make - sometimes it's not that hard to make money with stocks. (Not that I'm hoping for another recession)
I was never sure Canadian banks would make a recovery. However I was very sure that oil and gas price would come back up (not necessarily all the way back up), and that's what my investment was based on. You're right I got lucky with my timing and I've tried to include that piece of info in my posts.
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There are a few companies I would consider very close to risk free. Google, the biggest Chinese telecoms, RIO, the Canadian banks as that guy above me says. Also wallstreet banks are also pretty safe now too for the foreseeable future.
I would also fork over my soul to get a piece of facebook, but w/e.
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azndash, if your job is what I think it is, you may want to be cautious in just how much financial advice you give =P well, you probably already know all the regulations on workshops, etc., but might I advise you put disclaimers and all that legal BS in a spoiler in your OP?
also, how long have you been working in the finance industry?
I'm entering my 4th year of equity research, and I'm still cautious in giving out any kind of financial advice. I'm only comfortable making calls on maybe 7-10 stocks, at most? If there's one thing I've learned from my job, you gain a very healthy dose of humility dealing with the stock market... no matter how much research you do, how much of an edge you feel you have over the Street... you can always be wrong. Some of the most brilliant people I know who have been senior analysts for over 15 years still get calls utterly wrong -- it's nuts! And sometimes even if you are right 2 years from now, you can be so utterly wrong in months 1-23 lol. The stock market ... seriously, what a motherf*cker.
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On November 20 2010 22:50 gen.Sun wrote:
There are a few companies I would consider very close to risk free. Google, the biggest Chinese telecoms, RIO, the Canadian banks as that guy above me says. Also wallstreet banks are also pretty safe now too for the foreseeable future.
I would also fork over my soul to get a piece of facebook, but w/e.
This is, once again, such a silly statement. What do you define as "the foreseeable future"?
In 2000 or 2001, would you have said Yahoo had any risk whatsoever? How do you make the argument that Google is better positioned now than Yahoo was then...
RIO is great and all. Look up X 100 years ago.
Would you have said Wall Street banks were pretty safe 3 years ago? Like how can you make such claims, on what evidence?
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all i can say is that since i've started learning about the market in more detail (primarily due to my job), in the past 2 months (yeah i am a total beginner, no doubt about it), i've learned three things:
-i know fuck-all about the market, even after spending hundreds of hours, and it's going to stay that way as far as i can see
-i don't know how much experience you need to be able to confidently give advice, but i'd be willing to wager it's measured in years. and even then, no matter how good you are, the markets can fuck you over
-be lucky
edit: this was really @ rally_point, not the OP
i have no problems with suggesting spy, qqqq, iwm, etc
it's when you get into specifics like "large canadian banks" that i disagree
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to help minimize taxes consider a retirement account,
consider a ROTH IRA or your employer's 401k. Many employers will match a 401k contribution up to a certain % so it is definately worth putting extra money in there before your own investment account. A ROTH IRA is another retirement option where someone is allowed to pay taxes up front and avoid taxes on any of the gains. If you're worried about not being able to touch this money until you retire, i believe there are ways around this that i am not as familiar with. for example, these accounts let you borrow the money from yourself and i think the money can be used for home purchases also without penalties.
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On November 20 2010 23:30 Happy.fairytail wrote:
I'm entering my 4th year of equity research, and I'm still cautious in giving out any kind of financial advice. I'm only comfortable making calls on maybe 7-10 stocks, at most?
This is basically why most individual investors (ie. non-professionals) shouldn't even try to beat the market because you are basically up against professionals that are analysing the same few stocks day in day out. I can't really give advice on what to do but if you were to look at the actual performance of most fund managers over time they are horribly poor. Fees destroy your returns so if your gonna try pick individual shares then great, you might get lucky and you can brag to your mates, but I guarentee you don't have a special insight into a share that professionals haven't already priced in.
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I've done a bit of reading on investments. I'd say the best ways to go are an IRA if your employer matches it, or a CD if you have a large chunk of money. CDs usually have a minimum of $5,000, though, and to get the best interest you have to put it in a renewable cycle of at least 3 years.
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EPT
