NFRs2000NYC

Well guys, I have some investments, most of them are either mutual funds, or real estate. I wanted to have a go at regular stocks that I can trade often (under a year, sometimes even daytrade) so Im looking to throw down $500 bucks on etrade or scottrade and see what I can do with it. More of a learning experience that making the big bucks.

Anywho, I know $500 doesn't buy a lot of major stock, for instance apple, microsoft, etc. I was looking into companies that are trading in the single digits territory. I know we are not allowed to post anything regarding penny stocks, although I dont quite understand what makes them so bad. A coworker of mine bought some stock are 20 cents a share, and withina month, it was at 80 cents. Are single digit stocks considered penny stocks?


Anyone have any tips on good low cost stocks? Any advice greatly appreciated. If this is not something you guys like to give advice on, no worries.

WyattH

You can afford almost any stock besides for BRK.A

GOOG is around $470, AAPL at $100, YHOO at $sub 30. Havent checked recently.

But, you're right - - $500 doesn't do much.
There are a lot of other threads like this, and we tend to advise the same thing if you're working with less than $10K or so:
You'd have to stretch, learn, trade frequently, do your homework, etc etc to make a 30% return. Do you want to work that hard for, uhhh, $133/year?

Also, commissions on a $500 account will eat all of your profits.
Just put that money in one of your mutual funds for now, really.
Your desire to learn and practice is good - - read around, Google Finance, Yahoo, this site, etc. Also, you can make "fake portfolios" that help you see how you're doing without investing anything. Learn for free.

sahtt

Make a 'fake' portfolio as mentioned. You might be surprised how much work it is. After a couple weeks of dealing with it, reading quarterly reports, other documents, news briefs, various ratios/determinants, muchless simply checking the stock(s) itself, your 100$ earned is probably not worth the time because you find yourself 'forced' to spend all that time even if you don't want to because you already invested the $. For instance, if the stock drops 5% the next day, do you see yourself watching it daily until it goes back up?

I'd just continue to save as previously suggested.

cthree

Penny stocks are stocks < $1. You will likely get burned, they are illiquid and easily manipulated (ie they aren't controlled by supply and demand like exchange traded stocks but rather by the whims of a handful of people, usually insiders, day traders and promoters/spammers).

I applaud your interest in learning to trade stocks however $500 isn't enough to make it worth your while. It's too much work to justify the time. You also don't benefit from proper trading strategies and have to rely on luck. I have 8 long stock positions and 6 are up, 2 are down. That's how it works.

remedyzrider

Right on the money. Just to this a bit more tangible, always look at the average trading volume of a stock. This is a good indication of how "liquid" a particular stock is. Often with penny stocks average trading volume is very low with respect to the amount a regular person purchases (i.e. don't see 1 million shares and think it's ok when it's only $0.01/share). When trading volume is low you can essentially be stuck with shares when it comes time to sell as no buyers exist.

Biggest reason not to start with $500, imo. Even if you do one trade with an $8 commission, that's an immediate 16% loss on your investment. Remember at some point you'll also have to sell the stock for another $8 or (about, depending on hopeful appreciation) 16% decrease.

I would recommend www.virtualstockexchange.com as they allow short trading, margin use (you can even set the margin interest rate to be more realistic), and limit/stop orders. Only drawbacks is you can't trade mutual funds or options.

WyattH

$8 is 1.6% of $500.

But, even so, after you sell, its 3.2%, and that's if you put $500 (your entire basis) in one stock - - and that breaks another rule: diversity. The more you diversify, the bigger chunk the commissions will eat.

cthree

I had to rush out earlier so couldn't offer a complete response.

The addage money begets money is true in investing in stocks. You can rely on pure luck and speculate which in your case of $500 is what you are doing. I do much the same with options. It's not that you shouldn't bet on a stock it's just that you should see it for what it is, speculation. I'd hate to see you buy a stock, lose money and then think that investing in stocks is a sucker's game. It's not.

To make good returns on stocks you need to develop a planned portfolio of a diversified basket of stocks. In other words you need 5 or 6 or a few more in broadly diverse industries. You don't want a single event or cycle to affect them all.

Like I said I've got 8 stocks right now and on any given day some are up and some are down by varying degrees. Sometimes the all go up, sometimes they all go down. But the point is that regardless they move in varying amounts for different reasons. By having a diversified portfolio your returns grind forward. I'll never see a day when my entire portfolio is up 40% but I'll probably not see one where it's down 40% in a day either. It's the power of averaging.

If you can get $10K together and buy 5 diverse stocks worth about $2K each then you can earn a solid return through most market conditions. I recommend $2K so that you have a chance to liquidate some but not all of your position(s) to take profits or manage risk. Even at the $10K level commissions will eat into profits and restrict what you can do. The more money you have to invest the more you can make as commissions become a smaller percentage of your trading expense and you can trade your positions in smaller chunks. If you make a 20% gain on a stock you'd like to take 20% off the table. With a $2K position selling 20% to take a 20% profit will net you more like 15% after commission is factored it, a hefty hit. With a $20K position that drops by a factor of 10, $200K a factor of 100.

Yes the rich do get richer which is a good reason to aspire toward being rich

Go ahead and speculate with that $500 but don't be too disappointed if you get it wrong. Just realize that you're putting those 500 eggs ina single basket and taking a chance.

magician

[QUOTE=cthree,Apr 27 2007, 08:05 PM]Like I said I've got 8 stocks right now and on any given day some are up and some are down by varying degrees.

NFRs2000NYC

Alright...I just read all the responses, and wow....loads of info to absorb. Like you said Erik, Im a noob when it comes to stocks. I have had experience with penny stocks...actually one. I bought ETOYS when they were on the verge of bankrupcy, for 12 cents a share. I bought 4500 shares. Within 4 days, they were at 80 cents a share. Like a jackass (my inexperience comes into play here) I decided to leave it thinking "well, if it jumped that high, I might as well wait until the next jump." So, being a total moron, the following day it fell to 60 cents. Now, like a degenerate gambler, I decide "hell, I cant leave now, gotta wait until it climbs back to 80 cents." Well, the next day, they filed bankruptcy, and Shwab told me the stock is frozen and can no longer be sold.

I basically learned, that if you want to make money on stocks (short term) the only way thats possible is through quantity of shares. If I buy a stock that is $200 a share, so what if it doubles to $400 if I only have 5 shares...thats not that much money....and thats IF it doubles. This is the main reason I want a cheap stock...so I can buy a lot of shares. I dont even mind a super high risk stock.

My first thought when I opened up my etrade window was Ford. They are trading in the high 8s right now. They are at a price where they have only one way to go, or bankrupt. Do you REALLY believe that Ford will go bankrupt? Im not that convinced, and by reading the car forum, you can see my hatred for any car nailed together in the US.

As far as trades go, I have 100 commission free (bonus for signing with ETRADE) so I guess it's not that big of a problem right now. This is more of a "class" for me. The reason why I dont want a fake portfolio is simple. I had one in highschool. We had a "Bulls and Bears Club" with fake accounts with real stocks. I made 1.5 million from 10K within 7 months by investing in a company that produced farm equipment. The point is, you act differently when there is REAL money on the line. IMHO you dont learn with fake accounts, and that is evident with my ETOYS story.

So, like I said, Im not looking to pay my rent with a $500 investment. More of..make a couple of bucks, and learn how to PROPERLY invest. Thank you for your advice everyone, truly appreciated.

cthree

I agree with you, real money and fake money aren't the same even if the mechanics of how you trade them are similar.

What are your goals for this $500? If you put it a good stock as an investment and leave it there for a year or two what have you learned? If you bet it on a long shot and win or lose what have you learned? If you trade it around to the point where you've gained nothing and (theoretically at least) have paid it all out in commissions what have you learned?

As I said, I applaud your interest in taking control of the contents of your portfolio. You can do a much better job of managing your asset than 95% of mutual fund managers who, as discussed in a nother thread, can't even deliver returns higher than the S&P500 index with any consistancy. My concern is the you won't actually learn anything from this experiement and worse what you do learn will be the wrong lessons.

I'd really like you to watch Mad Money on CNBC weeknights at 6 and 9 PM Eastern Time. If you want to invest then invest time in learning how successfully make money at it. There is much you need to know but the rewards are significant.

Fund managers get paid based on their funds under management. They don't get paid based on returns. Financial advisors get paid based on the money you invest through them. They don't need to be successful investors themselves and most probably aren't since they buy much of the same crap they try to sell you.

Save your $500 and as much as you can muster up. Learn about the right way to invest it. Build a watchlist of stocks and do research on them. When you think you're ready to invest it well then jump in and build your portfolio and continue your homework. It's more about building a dicipline for investing and less about making lucky picks.