Basics of stock trading 101: Stock traders and Mono to me!

[Drakken]

Well, for a long while I've been thinking about gathering some capital to buy stocks and trade on the side, but I do not know where to start (or how much I should start with). Everyone I have been consulting is rather risk-averse (diversify, buy blue chips and banks, etc.), but I still have some doubts. So:

A) What would be a good starting capital for a private stock trading venture out of my own pockets? I planned around 3,000$ would be a good start (Canadian, but still).

B) Even with a small amount, is it still better to diversify my stock wallet or should I hit it big first by speculating on a few eggs in my basket and diversify later as my capital grows?

C) What about penny stocks? Buying 1c stocks and reselling it when it hits 2c or 3c seems easy, although risky if the said stock is to disappear after a short while. Thoughts?

And yes, I am a newb in this, so KISS. I want to learn, but I need to grasp the basics first. 

[Barrister]

Buy an index fund or ETF.

[Drakken]

Buy an index fund or ETF.

Okey. And why?

Index fund I get, but from what I read on them it is not very flexible. It's merely a fund attached to a stock market index and whose performance attempt to mirror the latters. So basically, if I take an index fund linked to TSX, for example, its performance climbs and falls more or less as the TSX index varies, right?

And what is an ETF? What are the differences?

[Admiral Yi]

The nice thing about index funds is they allow you to diversify without paying some dickhead fund manager half your earnings.

[Drakken]

The nice thing about index funds is they allow you to diversify without paying some dickhead fund manager half your earnings.

So, I guess I have to pay a basic fixed price to buy one, or are these variable?

How are returns on these calculated?

[Admiral Yi]

So, I guess I have to pay a basic fixed price to buy one, or are these variable?

How are returns on these calculated?

Variable.  Market price.

Not sure I understand the second part.  Do you mean how are dividends distributed?  The fund owns a trillion shares and they get paid the dividends on those trillion shares.  They split that up by the number of shares of the fund and give you your portion.  They keep a tiny bit for themselves.

[Drakken]

So, I guess I have to pay a basic fixed price to buy one, or are these variable?

How are returns on these calculated?

Not sure I understand the second part.  Do you mean how are dividends distributed?  The fund owns a trillion shares and they get paid the dividends on those trillion shares.  They split that up by the number of shares of the fund and give you your portion.  They keep a tiny bit for themselves.

Yes. Remember I am a newb in this.

So I guess it means I have to pay x amount per share, price fixed on the exchange. Can they be resold on the market if the price increases, akind to a share? Is there room for speculation?

[Malthus]

What is it that you want to do?

Really, your choice of strategy is more or less determined by how much risk you want to take. Do you want a Las Vegas style 'get rich or bust' strategy, putting up your $3000 and knowing you risk losing it all, or do you want to more conservatively grow your wealth - but with no possibility of huge returns?

The basic equation is simple: if you want big returns you must take big risks. There is effectively no way to guarantee returns without risks, or everyone would be doing it. Your risks are (somewhat) less if you study the hell out of the market, but even the experts get fooled. Everyone and their kid sister is peddling advice on how to make big returns without risks, but they are pretty well all lying. They will take your money for advice and you will still be screwed.

Myself, I stick my cash that I don't need in a mutual fund with reasonably low fees that tracks the Canadian, US and international stock markets, and forget about it. I have some in cash equivalents (GICs) earning a pitifully low interest, so that I'm not wiped out totally if the market crashes.

I use ING, because I can do everything online, and the fees seem low. There are probably even better options out there.

[Admiral Yi]

Yes. Remember I am a newb in this.

So I guess it means I have to pay x amount per share, price fixed on the exchange. Can they be resold on the market if the price increases, akind to a share? Is there room for speculation?

Yup.  As an example, I bought some shares of SPY, which is one of the index funds that tracks the Standard & Poors 500 index, back in March at $83 something.  I could sell them now at 112.30.

You could speculate through options.  Buy calls if you think the price will rise, buy puts if you think the price will fall.

I think most markets also offer shorter term pure bets.  My buddy up in Toronto used to make one day bets on the movement in the Canadian market.  I think Tamas does something similar.  Ask him for details IF YOU WANT TO LOSE ALL YOUR MONEY VERY QUICKLY.

[MadImmortalMan]

If you want to invest in individual stocks, start with something you know. A company or industry you know a lot about. Like the kind of company you work for, for example. Then check out the numbers on those companies. If you have a good idea about what does what in that kind of business, then you should be able to tell who are the stronger companies.

Pay attention to the price/earnings ratio and dividend rates and stuff. It's not that hard to figure out once you know what the numbers mean. The P/E ratio, for example, is probably the most important number for most people. It just means the total value of the stock compared to the annual earnings of the company. A P/E of 15 means the total value of all of the shares of stock the company has out there owned by everyone is 15 times the current annual earnings of the company. The lower the better (generally) because that means your share of stock represents more earnings. That's just one example. Try out one of those sandbox trading games. You can trade fake money and see how it works.

Day trading like Yi said is bad and hard to do successfully. I prefer to trade in companies I know are strong because I did research on them. And I don't generally make short-term trades. I've never bought a stock and sold it the same day.

One thing I like to do is do most of my stock buying on days that the market is tanking. If Bernanke says something about raising rates or Obama makes a speech about banging banks around or bad unemployment numbers come out and the Dow goes down 150 or 200 points---That's the day I am buying stocks. That's pretty much the only thing I do that resembles trying to time the market.

[Barrister]

Buy an index fund or ETF.

Okey. And why?

Index fund I get, but from what I read on them it is not very flexible. It's merely a fund attached to a stock market index and whose performance attempt to mirror the latters. So basically, if I take an index fund linked to TSX, for example, its performance climbs and falls more or less as the TSX index varies, right?

And what is an ETF? What are the differences?

ETF is basically the same thing.

Why?  The reasoning goes (which I am persuaded by) is that vanishingly few people can outperform the market year after year.  Most mutual funds don't outperform the market.  So why do you think you're smarter than 90% of people out there?  The market over the long term tends to outperform many other investments.  So invest in an index fund so you can invest (indirectly) in the entire stock market at once.

Also there's the issue of expense rations.  Many mutual funds charge you a noticeable percentage of gains just because they manage your money.  Individual trading, you're paying fees that can quickly add up.  Since an index fund / ETF is so simple, the fees are very low.  So you're making money by not giving it to financial experts who, many times, can't even outperform the market to begin with.

[citizen k]

The only thing I would add is, go with what you know. Invest in companies or sectors that you are interested in. You will be more inclined to do the due diligence or research that is required to make informed investment decisions.

[Drakken]

What is it that you want to do?

Really, your choice of strategy is more or less determined by how much risk you want to take. Do you want a Las Vegas style 'get rich or bust' strategy, putting up your $3000 and knowing you risk losing it all, or do you want to more conservatively grow your wealth - but with no possibility of huge returns?

The basic equation is simple: if you want big returns you must take big risks. There is effectively no way to guarantee returns without risks, or everyone would be doing it. Your risks are (somewhat) less if you study the hell out of the market, but even the experts get fooled. Everyone and their kid sister is peddling advice on how to make big returns without risks, but they are pretty well all lying. They will take your money for advice and you will still be screwed.

Myself, I stick my cash that I don't need in a mutual fund with reasonably low fees that tracks the Canadian, US and international stock markets, and forget about it. I have some in cash equivalents (GICs) earning a pitifully low interest, so that I'm not wiped out totally if the market crashes.

I use ING, because I can do everything online, and the fees seem low. There are probably even better options out there.

I intend to go fractal, step-by-step growth of my capital both by increasing my capital out of my own pockets punctually and raking in my gains to expand and diversity my wallet.

My planned strategy is to put 2/3 of my starting capital in something long-term and low-interest, yet time-limited plans (triennal, perhaps) so I could reap some profit after a while and rethink my investments, and use the remaining 1/3 for speculation into riskier venues. I assume that this 1/3 is at risk, but would make the bulk of my profit dynamics, while the remaining 2/3 lie in safer investment plans. To keep in simple, I could put this 1/3 into index funds, with the benefits BB explained to me, while this 2/3 sit in some 3-years investment plan out of sight, out of mind.

(Of course, this sharing of my capital can be changed. Perhaps 2/3 in index funds, and the remaining 1/3 in something more long-term).

Bear in mind that, in fact, I opt to add capital in regularily, perhaps a 1K per year as a minimum after the first investment. Basically money I don't need and that could put into good use somewhere else.

My main problem, of course, is where to start. I am with Desjardins currently, but the problem with them is that I feel they'll attempt more to sell their own investment plans to me, and rip me of a share of my profits whenever I make a transaction through them.

And also, there is the whole issue of taxation on capital. How much does our Big Government steal.. .errrrr tax you of money due to your money invested?

[Malthus]

What is it that you want to do?

Really, your choice of strategy is more or less determined by how much risk you want to take. Do you want a Las Vegas style 'get rich or bust' strategy, putting up your $3000 and knowing you risk losing it all, or do you want to more conservatively grow your wealth - but with no possibility of huge returns?

The basic equation is simple: if you want big returns you must take big risks. There is effectively no way to guarantee returns without risks, or everyone would be doing it. Your risks are (somewhat) less if you study the hell out of the market, but even the experts get fooled. Everyone and their kid sister is peddling advice on how to make big returns without risks, but they are pretty well all lying. They will take your money for advice and you will still be screwed.

Myself, I stick my cash that I don't need in a mutual fund with reasonably low fees that tracks the Canadian, US and international stock markets, and forget about it. I have some in cash equivalents (GICs) earning a pitifully low interest, so that I'm not wiped out totally if the market crashes.

I use ING, because I can do everything online, and the fees seem low. There are probably even better options out there.

I intend to go fractal, step-by-step growth of my capital both by increasing my capital out of my own pockets punctually and raking in my gains to expand and diversity my wallet.

My planned strategy is to put 2/3 of my starting capital in something long-term and low-interest, yet time-limited plans (triennal, perhaps) so I could reap some profit after a while and rethink my investments, and use the remaining 1/3 for speculation into riskier venues. I assume that this 1/3 is at risk, but would make the bulk of my profit dynamics, while the remaining 2/3 lie in safer investment plans. To keep in simple, I could put this 1/3 into index funds, with the benefits BB explained to me, while this 2/3 sit in some 3-years investment plan out of sight, out of mind.

(Of course, this sharing of my capital can be changed. Perhaps 2/3 in index funds, and the remaining 1/3 in something more long-term).

Bear in mind that, in fact, I opt to add capital in regularily, perhaps a 1K per year as a minimum after the first investment. Basically money I don't need and that could put into good use somewhere else.

My main problem, of course, is where to start. I am with Desjardins currently, but the problem with them is that I feel they'll attempt more to sell their own investment plans to me, and rip me of a share of my profits whenever I make a transaction through them.

And also, there is the whole issue of taxation on capital. How much does our Big Government steal.. .errrrr tax you of money due to your money invested?

You are Canadian, right?

If so, you can invest up to $5000 per year tax-free in a TFSA account.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

Also, depending on what your income is and your plans are, you can save taxes by investing in an RRSP. I do that, because in my tax bracket, it makes sense (you pay taxes based on your income when you withdraw it).

[Drakken]

You are Canadian, right?

If so, you can invest up to $5000 per year tax-free in a TFSA account.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html

Also, depending on what your income is and your plans are, you can save taxes by investing in an RRSP. I do that, because in my tax bracket, it makes sense (you pay taxes based on your income when you withdraw it).

Yes, I am Canadian. *coughs* 

I already invest in a RRSP plan via Royal Bank through my job, around 1400$ per annum matched by my company (So 2800$ per annum in RRSP).

I'll definitely go for CELI/TSFA as a tax shield. Great for accumulating capital, I must say.  However, I have seen that many banks put adninistration fees that basically eats up any tax savings I might earn for its use.