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Plain Language Place .com - "The Place to Learn About the Stock Market - in Plain Language" |
Commonly Asked Questions of New InvestorsWhat is the minimum amount of money I need to get started?I would say that $5,000 would be the minimum. This allows you to buy 100 shares of a $50 stock or 200 shares of a $25 stock, etc. Although you can open an account with $1,000 or even $500. It will be hard to buy enough shares to make a significant profit with the lesser amount of funding. The money used for investing in the stock market should not be needed for at least 3 years and perhaps 5.What is the safest investment?The only “risk free” investment is buying U.S. government debt and holding it to maturity. This debt can be purchased as treasury bills, notes and bonds. The U.S. government has never defaulted on its debt obligations. The government also has the power to tax so it theoretically has an unlimited pool of cash to pay its bills.Do not be confused thinking that U.S. Bond Mutual Funds are risk free. Bond mutual funds engage in trading to increase their profit yield and the risk in that can be quite substantial. Only by holding bonds to maturity will assure you will be paid your promised interest rate with the full faith and credit of the United States. It should also be noted that “risk free” and “safest” are misleading. It is quite possible that the inflation rate will be greater than the interest rate you are receiving from your bonds. So over time the purchasing power of your money may actually decrease. As you well know, $1,000 in 1980 would buy a lot more than a $1,000 in 2006. You need growth above the inflation rate to get ahead or just stay even and that involves taking some risk. What area should I stay away from?The answer to this question will change with the economic climate in the world. Sometimes oil and energy stocks should be avoided and sometimes they should be bought aggressively. The same for health care, financial, automotive or any kind of stocks actually. But there are a few investments that should almost always be avoided because of very high risk.Don’t buy stocks that cost less than $2 is a good rule. Don’t buy stocks that are not listed on a major exchange such as those that trade on the “pink sheets” or the “bulletin board”. Never buy a stock that is recommended in an unsolicited email that you receive. Those emails that hype certain cheap stocks could have likely come from a Tony Soprano type working a “pump and dump” scheme. In my opinion however the stocks that should be avoided in 2006 are U.S. automakers (super high health care costs), land based radio stocks (satellite radio is on the rise) and old fashion phone companies offering long distance (long distance is free on most cell phones). Small biotechnology companies that don’t have any sales yet are also very risky. The cost of getting a new drug to market is huge and the process is complex. What's the best deal for investing - on my own, or through a broker and does a broker do anything for me?I would recommend opening an account at one of the larger discount “brokers” like Ameritrade, E-Trade, T.D. Waterhouse or Fidelity. They have reasonable commission rates usually under $20 per trade and have a large and happy customer base that is growing. You must do your homework investing on your own but that is what this web site is all about.A traditional broker who recommends stock purchases can charge in the $200 per trade range and that is the price of someone else doing your homework. It is illegal for them to recommend trades that are not suitable for the individual investor, but they make more money the more you trade. So you end up needing to do your homework just watching what they do. Just do it yourself. What area is the fastest growing - greatest return?This is the $64,000 question. What areas that are growing the fastest depends on the world economy at the moment. Although it would be reasonable to say that growth stocks trading in the $2 to $10 range offer some of the fastest growth. Remember the “law of small numbers” which is that if a $50 stock goes up a buck you have made a 2% gain, but if a $5 stock goes up a buck you have made a 20% gain. Smaller stocks are riskier but the reward is greater as well.In my opinion for 2006 companies involved in wireless technology seem poised for rapid growth. The oil and energy stocks could rise even further if the Iran situation gets out of hand. The unit of General Electric that had the biggest growth in the 4th quarter of 2005 was Wind Power. But unless you are willing to watch your stocks on a daily basis a diversified portfolio of stocks spread across at least 5 different industries is the best approach. I've heard of penny stocks - are they a waste of money?In only but the rarest cases they are a waste of money. A penny stock is one that sells for less than a dollar and are very small companies. Stocks trading below a dollar for over 30 days are usually de-listed from the New York Stock Exchange and the NASDAQ. Stocks that have been de-listed have very little trading activity and could be very hard sell when the time comes to cash out.
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by PLP's
Ken Mueller
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