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The Stock Market, For Dummies

Investing for Dummies
Photo Credit: epicharmus via Compfight cc

I studied finance in college, but in all honesty I have a really hard time talking about investments with finance majors. When people ask us for advice, the lot of us tend to over-complicate our responses to a great degree. A simple question like “where should I invest my money to get the best return” are met with responses about calculating PE ratios, looking at capitalization, split history, etc.  In our defense, there are a great deal of factors that one could use to determine if a particular investment is worthwhile, but the majority of people don’t have the time nor the desire to put this kind of thought into their investment portfolio.

Want to know a secret? I don’t have the time or desire, either. In fact, I feel like investing in the stock market would be so much more common if people knew the truth of how easy it is to do.

Get Your Money in Stocks Now – Worry About the Specifics Later

Forgive me if this sounds simplistic: Step One is to get your money in the market. Don’t sit around for months trying to figure out what you want to invest in – put your money in the market today and refine your investment style over time. You don’t even need a great amount of cash on-hand to start investing, so don’t wait around until you have $1,000 or some other arbitrary amount. You can be trading in the market as soon as this week for $50 or less.

The reason this is great advice is simple: the more you procrastinate this, the more likely it is that you’ll either psyche yourself out or end up spending your money on something else. So with the spirit of this in mind, here are the steps you should take:

1. Go to www.Etrade.com and open up a brokerage account: I have no affiliation with E*Trade, by the way. It just happens to be what I use for many of my investments and I know the tips and tricks to get the most of your money.

2. Once you’ve got your brokerage account set up and funded, click on the “Research” tab at the top of the screen and then click on “ETFs.”

3. Once in the ETF screen, click on “Commission-Free ETFs.”

At this point, you are looking at a large list of Exchange-Traded Funds (ETFs) that E*Trade will let you purchase and sell shares in completely free of commission. Why is this a good idea? Because if you’re only investing a small amount of money at a time, you don’t want your returns eaten up by commission fees. Example: If you only want to invest $50 per month, a $5 commission fee would take a 10% chunk out of your investment right away. Why not circumvent that problem with Commission-Free ETFs?

4. The list of Commission-Free ETFs is limited and subject to change at any time. My favorite ETFs in this list are the ones from WisdomTree. If their funds are still available, there should be a tab above the list of ETFs that says “WisdomTree” that you can use to filter your results.

5. If you’re having trouble picking a fund, I suggest WisdomTree’s U.S. Dividend Growth Fund (DGRW). Why? Because I love dividend investing, and this fund has a reasonable expense ratio.

6. Click the “Buy” button to the right, enter in the number of shares you want, and execute the trade.

7. ???

8. Profit!

Okay, the last couple steps are paying homage to one of my favorite South Park episodes.

Wait… What is an Exchange-Traded Fund (ETF)?

Exchange-Traded Funds (ETFs) are similar to mutual funds, except the expense ratios are typically much lower. ETFs either track an index (like the S&P 500), commodities, or a group of assets. The expense ratios are lower because there is usually less active management of ETFs. An ETF tracking the S&P 500, for example, would only place trades in the spirit of aligning with the stocks in the S&P 500.

The reason I suggest ETFs to a new investor is because you can buy as little as one share, as opposed to mutual funds where you typically have a minimum investment (as well as oftentimes a minimum monthly investment), the expense ratios are low, and in the case of the E*Trade Commission-Free ETFs you can even purchase some of them with no up-front cost other than the amount of your investment.

Now for the “Worry About the Specifics Later” Part

Now that you’ve got a little money in the market, commit yourself to putting a little bit in each month. I set up an auto-transfer from my checking account to my E*Trade account biweekly on the same day I get paid. While you’re watching your account value grow over time, spend an hour or so each week taking a look at other ETFs, mutual funds, and individual stocks. When an investment intrigues you, put it on your E*Trade watch list and keep track of it for a while.

Over time as you accumulate more money and knowledge about investments, you might choose to sell your Commission-Free ETFs and purchase other investments. At the time of this writing, E*Trade charges $9.99 per trade for stocks (including ETFs), so if you made a $1,000 investment in Disney (DIS), for example, you’d pay $9.99 or about 1%. This is much more reasonable than paying $9.99 on $100.

If you decide later that you’re going to be making lots of trades, you could seek out a broker other than E*Trade that has lower commission fees.

Simple, Right?

To be entirely transparent, this is exactly how I invest my money. I’ve got a Roth IRA through E*Trade that I do most of my investing in, and currently all my money is in Commission-Free ETFs. The biggest investing mistake I made when I was younger was starting right out on individual stocks and trading them often. My $1,000 initial investment at age 18 quickly dwindled down to $700 simply because I was making a handful of trades every day. I was having fun, but I was losing money. I lived and learned. Then I went through a period of time where I was trying to out-smart the market by spending hours and hours doing research and trying to predict which stocks were set to rise. I was right about 50% of the time and wrong the other 50%. My results were mostly pretty average with the market. Again, I lived and learned.

Today, I keep it simple. Priority #1 is getting the money into the market and earning myself a return. If I find an investment that I really think is a winner, then I have no problem making a transaction. Generally, though, I’m happy with my simplistic approach. It’s easy, it’s effective, and I don’t have to monopolize my time always trying to keep up with the latest trends in the stock market.

Any questions? Let me know in the comments section below!

 

 

 

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June 16, 2014   By: admin
  • http://www.work-to-not-work.com Zee @ Work-To-Not-Work

    Hey Zac,

    I must say that this is a great topic :) I just wrote about this yesterday in fact. Except in my post I emphasized the point that if you invest in the absolute worst thing possible, you’re still better off than not saving anything at all.

    If everyone knew what to invest in, then no one would be working for a living, everyone would be picking the next great stock. Everyone starts making mistakes, but you learn from them and over time you get better, but if you never start then you’re always going to be behind.

    Step 1, collect underpants…. Step 3, Profit!

    • http://www.moneyjournal.com Zac Fields

      Thanks for commenting – yeah, I responded to one of your posts over on BudgetsAreSexy and then I tagged you in my Twitter status shortly thereafter. It occurred to me afterward that tagging someone I didn’t know on an article titled “The Stock Market, for Dummies” could have been taken the wrong way, and I’m glad that didn’t happen! I just saw you share this same sentiment over there and thought you’d enjoy the read.

      There’s just so much contradictory financial advice floating around out there. There are a lot of people who get paid to manage finances, and they have a vested interest in making you think it is just too complicated of a thing for you to take on by yourself. Thankfully, there are guys like us who just say “Throw a dart at the wall – buy whatever stock it lands on” for all our like-minded friends who don’t want to over-complicate things.

      • http://www.work-to-not-work.com Zee @ Work-To-Not-Work

        haha, yeah I saw that you replied to my comment over there so it wasn’t out of the blue. But yeah, you’re right, there are a lot of financial advisors who need to make things more confusing than they need to be. It’s kind of like most contract agreements, why do layers and corporations use ridiculous jargon that just makes it hard for the average person to understand.

  • http://afrugalfamilysjourney.blogspot.com A Frugal Family’s Journey

    Interesting post and take on investing. Left me a little unsure but I think the main point of your article was simply to say – start investing. Even if you don’t do so well, you are still (hopefully) learning from it.

    Although I agree that one must take that first step and invest, I have to say that you need to at least partially understand what you are investing in. For most, since I believe you should only invest money that you don’t need right away, I think one should always look for stocks, ETFs, or whatever as long term holds.

  • http://divhut.com DivHut

    Great article for any newbie investor. I totally agree with the ‘invest now’ worry later mantra. Too many people get bogged down with analysis paralysis and end up doing nothing or waiting an eternity to invest losing compunding time especially if you are a dividend investor. Thanks for sharing.

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