Investing Basics Pt 1

Many people think it is beyond their reach to get started in the stock market.  In reality, it is not very hard at all.  However, what is hard for many is knowing what to buy and being able to stick it out when things get tough.

Let's talk about how to get started.  There are a number of online brokers such as ShareBuilder, Scottrade, Fidelity, and TD Ameritrade.  Personally, I use ShareBuilder, but each online brokerage is a little different and has certain pros and cons.  When deciding on which broker to sign up with, you want to look at how much they charge for commission per trade, if they offer automatic investing, and what features or resources they have available for their customers.  More advanced investors should research the requirements for margin accounts and see if options trading is available.

Novice investors are going to care mostly about commissions (what the brokerage charges you each time you place an order to buy or sell shares of a stock).  Most online brokers charge between $7-15 per trade, which is substantially cheaper than a brick-and-mortar investment house like Edward Jones where you may pay $100 per trade, not to mention annual maintenance fees or other hidden fees.  The difference is that with online brokers you are on your own.  You must do your own research, trust your own instinct, and keep your own records for tax purposes.  This sounds intimidating, but it is really not if you have the will to learn how to invest.  I did it on my own as a 24 year old who knew nothing to begin with, so anybody can do it with a little work.

I began investing in July of 2008 by purchasing 35 shares of Ford Motor Company (F) at a little over $5 per share.  For those doing the math, that means my trade was $175, and that does not include the $9.95 commission I paid to make that trade.  As I soon learned, it is far more wise to save up and buy a large block of shares than a small block as I had done.  Since I had paid $9.95 in commission fees, Ford's stock would need to rise $.29 just to break even on my investment (35 shares x $.29 = $10.15, greater than my $9.95 commission).  As you can deduce, if I had only bought 20 shares the stock would have needed to increase $.50 just to break even.  This break even amount will vary depending on the number of shares you buy and the price per share you pay.

To be continued...