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| No-fee investing puts the stock market in everyone's reach. But it's easier to make costly mistakes. |
Although most investing apps charge small monthly fees, Robinhood lets you do whatever you want with your own money. A few of the major brokerages are feeling the heat and offering limited free trading. Companies like Charles Schwab and Motif are probably the next best choices after Robinhood. Even though they may charge some trading fees, both companies have some no-fee options. Also, like Robinhood, they don't have minimum requirements for account balances.
Small investors, especially people new to investing, should take advantage of the no-fee options. You'll have to wait for execution and you may have limited choices but it's important to learn how the stock market works.
The Stock Market In a Nutshell: You will never buy low enough or sell high enough.
There are two kinds of stocks: those worth having and those you need to avoid. Everyone decides for themselves which is which. I like stocks that pay dividends from earnings and increase in price gradually and steadily. But you won't find many like that in an affordable range. So your next best bet is to look for mutual funds. For your budgeting purposes the main difference between a stock and mutual fund is that the mutual fund charges an administration fee.
Mutual funds can be less volatile than individual stocks. A "balanced" fund tries to mitigate the risks of different types of stocks with diversified investments. An S&P 500 index fund is a good example. These index funds, or ETFs (exchange traded funds) have low administrative fees compared to actively managed funds, but even among the ETFs some brokers charge higher administrative fees than others.
DRIPs: Investing Made Easy
Before you go too far into the world of investing, you'll want to sign up for a few Dividend Reinvestment Plans. You can do that through a brokerage like ComputerShare. Why do this? Because these are stable companies that usually pay quarterly dividends. They'll reinvest your dividends for you and your investments compound over time, building up value.
You don't have to think about buying these stocks because they will buy themselves for you. You can also own fractional stocks in these plans, which is good when it comes time for a stock split.
There are many Websites that explain the benefits of dividend reinvesting. Many companies offer these plans to their employees through their ESOPs (Employee Stock Option Plans). Check out sites like Dividend.Com, DirectInvesting.Com, SimplySafeDividends.Com, and others for all the gritty details about this type of investing.
While DRIPs don't outperform the market in my experience they avoid a lot of the volatility. Mutual funds work like DRIPs when you invest in them through tax-deferred plans like IRAs and 401(k) plans.
The only downside to a DRIP, if there is one, is that you must report the dividends on your taxes even though you don't actually see the money. It's income unless you buy the DRIP through a deferred-tax plan.
Should You Microinvest Directly or Use a Deferred-Tax Plan?
This is an intensely personal decision. I don't recommend deferred-tax plans. They work on a simple basis: you may pre-tax contributions to them (or deduct the contributions from your income at tax time). You only pay taxes when you withdraw money from the plans.
I've had to withdraw money from them that wasn't eligible for exemptions. That means I paid a 10% penalty on those emergency withdrawals.
Congress never meant to create these plans. They were devised by a clever benefits broker in 1981 who saw a sort of loop-hole in the law. People have lost hundreds of billions of dollars in tax-deferred plans ever since.
Your chances of investing more wisely don't change if you use either a tax-deferred plan or buy directly through an app like Robinhood. The only difference is that if you retain control over your money you will never pay a 10% penalty.
Brokers who earn commissions by selling people annuities, IRAs, and other plans will tell you how much smarter it is to pay them commissions by purchasing their products.
You make the call. As I said: it's an intensely personal decision. I've made mine.
To Me, There are Three Types of Investments
1. Buy and Hold Investing The simplest, "don't make me think about it" investment is what we call a BUY AND HOLD investment. This can be anything: a rare coin, a piece of art, land, a few hundred shares of stock, shares in a mutual fund, etc.
You pay whatever the market price is and then forget about the investment for years.
2. Buy Low, Sell High Investing This is what I call traditional stock market investing. Whether you're a day trader or someone who buys stocks, holds them for a few months, and then sells them, if your intention is to make a profit from buying and selling your strategies fall into this category.
Even hedge investors, the people who sell first (by "borrowing shares" from their brokers) and buy later (returning the "borrowed shares" to their brokers) on margin are trying to buy low and sell high. Whether you buy or sell first doesn't matter. What matters is that you want the price you pay to be lower than the price you sell at.
This is very difficult to do and most people lose money at it. You don't know which stocks are about to crash and which are about to take off. Even if you only trade in mutual funds you don't know which ones are about to go up or down.
Good investors study their chosen markets carefully and they learn to watch for signs that companies are in trouble, having good years, etc. The more experience you have the better you may become at this kind of trading. The only way to get that experience is to start trading. This is why I recommend people begin with buy and hold strategies. Protect the first part of your portfolio so you don't feel like you have lost everything when the market turns against you.
And the market will turn against you.
3. Managed Investing This includes those deferred-tax plans I mentioned above but really this is about paying a financial expert to manage your money for you. This is the person you call "your broker". You may only have to pay a commission on trades or you may have to pay a retainer. You'll need a lot of money to afford a monthly retainer. You can sign up with some brokerages online and use their automated systems. The industry is changing.
People who only invest through IRA or 401(k) plans are using Managed Investing strategies. You can practice buy-and-hold investing or BLSH investing through a deferred plan, but you're not executing the trades immediately, you're paying administrative fees, and you don't have direct control over your money.
Some apps like Robinhood offer Limited Managed Investing. You can place orders to withdraw your money or sell stocks but you have to wait for them to make that happen. You have more control over a taxable investing account than you have over deferred-tax investing account.
Every investing program I have looked at falls into one of those three categories. A few fall into 2 of them.
How Much Risk Is Too Much?
If you are feeling desperate and want to make money quickly in the stock market you should only invest money you can live without. You'll make mistakes. I've read stories about a lot of successful investors who made millions in the stock market with the BLSH method. They all said they made mistakes at the beginning of their trading careers.
So treat investing like gambling: it's entertainment until you make enough money to actually need to do something right. You can spend $200 on a concert ticket or you can invest it in some stocks and see what happens.
If you let your emotions make decisions for you then you'll lose money. Stock prices go down for the dumbest of reasons. If one company in a sector has a problem investors start selling stocks from similar companies. Why? Because they don't want to be holding a stock from another bad company. They don't actually know anything. They just panic. Usually good company stocks recover their market prices after a few weeks or a few months.
If you don't sell you haven't lost anything.
Most stocks and mutual funds bounce up and down in what is called a "trading cycle". Think of it as the goldilocks zone for market value for the shares in that stock or fund. It's okay to buy inside that zone as long as you don't sell below it. You only want to sell out if the company is in trouble, and then some people wait too long.
A good rule of thumb is to sell a stock at 10-20% below its 52-week cycle. If it goes lower and then comes back up you have the option of buying back into it, but you may find a less volatile investmetn before then.
