In this post today, I wanted to talk about beginning investing, where do you start if you are starting from scratch? I thought the best place to start is with my seven year old son.
A few years back, I figured it was time to start beginning an investment program for him and to learn about money. When we all begin investing, we start from scratch and that’s what this post will focus on. The first thing I did was put him on a regular paycheck just like we get. I made the amount equal to his age. Each week he gets paid, he puts a dollar into a savings account and a dollar into a sharing account or ten percent into each account whichever is greater. The rest he can spend as he sees fit. After that I set up an automatic payment of ten dollars to go directly to another savings account. After awhile, the money starts to add up.
The first lesson to learn when you are beginning investing in stocks is to pay yourself first out of each paycheck or whenever money comes in and never touch it. That’s the lesson I am trying to share with my son. Each and every week he saves money and each and every week, I put some extra aside for him.
Because we were dealing with such small amounts, I had to figure out where to keep the money. We started with our local bank which happened to be Chase. There are different account types for beginning investment and in this case we used a custodial account type since he was a minor. He and I went down to our local branch and opened three accounts. One for spending, one for sharing and one for saving. If you have been to your bank, you’ll quickly discover that banks don’t pay any interest to their depositors, particularly to small investors like my son. These accounts which we set up as custodial accounts, are primarily there to hold money so that we don’t have to keep it at home. We can also track it.
After setting up some holding accounts, it was then time to find a saving account that offered a higher rate of interest. In this particular case, we finally settled on Capital One. Capital One’s minimum amount to open an account was one hundred dollars and once we had enough we opened another account there.
Once we got that account opened, I think at the time it was paying close to four percent which was good, I moved my automatic ten dollars a week to go to Capital One instead of Chase. The reason the Capital One account pays more is because it is a MMDA or money market demand account.
At the end of the year, he earned twenty seven dollars and some change in interest from his savings account. Relative to his paycheck of seven dollars a week, he earned over a month’s pay in passive income which we reinvested back into the account.
We are using the Capital One account to reach the minimum amount needed to open a brokerage account. At some brokerage firms, the account minimums are from two to five thousand dollars. I know that they are some firms out there that might offer lower limits and I’ll have to research that for another post.
After a savings account, a beginning investor could start investing in US Saving Bonds or in precious metals. Because of the economy, we have looked into buying a portion of silver and gold as well.
Another avenue for the beginning investor are CD’s at the bank. CD’s or certificates of deposit are short-term investments with different maturities ranging from three months to seven years. Once you see banks really promoting long term CD rates, you can expect that rates are heading up and they want to lock you in now.
I know that when my wife’s grandfather retired, he had purchased US savings bonds through payroll deduction week in and week out. The nice thing about payroll deduction is that it puts your investment program on autopilot which I think is very important.
The other avenue we might go is with a stock index fund. Stock index funds have lower fees and look to yield a return equal to the index the follow. Some stock index funds match the S&P 500, some mimic some international stock exchanges and there are many more types of index funds out there. While penny stocks are cheaper, I’m not sure that we will start there.
Steps To Beginning Investing
Here again are the steps to beginning investing:
1. Open a savings account at a local bank to park your money until you reach the minimum for a higher payer money market account. If you are working at a job with a 401k plan, make sure you are participating to at least the level of any employee matching.
2. Decide a regular amount that you can pay yourself each week or each paycheck. Make this an amount that will not hurt. Don’t be afraid to start small. Just start. After awhile, raise the amount until it starts to hurt.
3. One you reach the minimum needed for a money market account, look for one that pays a higher rate of interest and start putting all of your money in that account.
4. Start researching options for the next step in beginning investing. Look at brokerage firm minimums for starting a stock index S&P 500 or similar index to track the market or to do online stock trades. Also, consider buying US Saving Bonds, precious metals like silver and gold and certificates of deposit. You’ll want to hold off on the FX online trading until you get more experience.
What Should A Beginning Investor Read
Over the years, I’ve discovered that the investment news sources available to a beginning investor are not really interested in the success of the average investor. They are more interested in selling their product. Of course, there are exceptions. But, the mainstream media, including cable news, are more about sensationalizing the news that giving information that is researched and relevant to helping you succeed.
My choice for analyzing the financial markets is the Investors Business Daily or IBD. I read Investors Business Daily and consider it the only news source truly interested in making the beginning investor money. The founder of the company has even written a couple of books that are very helpful. One of which is How To Make Money In Stocks.
I highly recommend these tools and strategies to any one beginning investing from scratch.
{ 4 comments… read them below or add one }
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
I completely 100% disagree with the statement on investors business daily for multiple reasons.
Reason #1 IBD focuses on mainly growth companies, with a small mix of value companies, and all of the articles that are published in the newspaper are about fundamentally sound companies, that are approaching an entry point for a short to mid term investment. If you are beginning investing, knowing that a company is fundamentally sound, and has a buy point of $14.something will do you no good whatsoever if you do not have a sound understanding of how the stock market works
Reason #2 The only thing that IBD has for the beginning invetor to understand, and coax them into buying the newspaper are those everflowing upward charts, which I will admit those things can be quite appealing, cause we all know there is nothing like buying a stock and watching it just keep on riding that wave, but however if you are a beginner, and blindly investing in stocks with buy points approaching in IBD, you will have no idea what to do, if there is a market correction after a purchase, as well as what economic and other news drives these movements.
Reason #3 This can be argued by some as there is a big difference investors who use technical analysis and those who use fundamental analysis, but I think even the beginning investor would blindly agree that even those upward flowing waves of updates from the NYSE can sink down, and cause a tsunami if the company is not financially sound. I think it would be better advice to teach someone learning about investing fundamentals, and let them graduate to the technical analysis of stocks if they are so interested.
I speak from experience when I say that IBD is very good at making you think that you know whats going on.
@Dan Heil
Thank you for your comments about using IBD as a beginning investing tool. I’ll probably surprise you in the fact that for the most part I agree with your reasons completely.
I think that it can be argued that none of the mainstream choices for financial news is really appropriate for the person just beginning an investment program and many times for those with investment experience as well.
Given a choice between USAToday, Wall Street Journal, Barrons, Money magazine and IBD to name a few, I prefer IBD. Don’t even get me started with the cable news channels.
The main reasons that I prefer IBD is because it teaches an investor to first look at earnings and growth rates as well as that it teaches that market fluctuations are a result of the current supply and demand for the stock created mainly by institutional investors. The more people (institutions) buying, the higher the price. The less people buying, the lower the price.
In addition, I prefer the way that the market information is laid out in the IBD over the others. Primarily because the underlying fundamentals are also incorporated into the stock charts.
I do agree with you, that a beginning investor doesn’t need IBD because it also tackles technical analysis and would have probably been better placed in another blog post better suited to a discussion of it’s use.
My advice for the beginner would be:
1) no day trading
2) don’t speculate
3) invest in long term
4) start with ETFs
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