First time investor and online brokerage accounts

Question

I have some extra money which I would like to start investing. I am a first time investor so I know very little about personal investing. I have about 1000 dollars to invest. I want to use an online brokerage tool to trade. But before that I have some questions -

• Is it a good idea to invest only in US or diversify worldwide?
• I am 28. Should I be a conservative investor or take some risks?
• What online brokerage service is the best? I have heard a lot about Scotttrade but want to be sure before I start. It seems to be the least expensive and most user-friendly to me.
• What is a margin account and how would it affect my investing? From what I understand it comes into play when an investor borrows money from the broker. Do I need to use it at all as I won't be investing on a big scale yet.
• Should I keep adding money on a monthly basis to my brokerage account to give me more money to invest or keep it at a certain amount for an extended period of time?
• How should my breakdown my investments in terms of bonds vs stocks?

If there is any other advice, I would really appreciate it.

Thanks

Answer 1

First, let me say that $1000 is not that much of amount to invest in stocks. You need to remember that each transaction (buy/sell) has fees, which vary between $4-$40 (depending on the broker, you mentioned Scottrade - they charge $7 per transaction for stocks and about twice as much for some mutual funds).

Consider this: you invest $1000, you gain $100. You'll pay $15 in fees just to buy/sell, that's 1.5% expense ratio. If you invest in more than 1 stock - multiply your fees.

To avoid that you can look into mutual funds. Different brokers offer different funds for free, and almost all of them carry many of the rest for a fee. When looking into funds, you can find their expense ratio and compare. Remember that a fund with 1% expense ratio diversifies and invests in many stocks, while for you 1.5% expense ratio is for investing in a single stock.

Is it a good idea to invest only in US or diversify worldwide?

You can invest in the US, but in funds that diversify worldwide or across industries. Generally it is a good idea to diversify.

I am 28. Should I be a conservative investor or take some risks?

Depends on how bad of a shape will you be if you lose all your principle.

What online brokerage service is the best? I have heard a lot about Scotttrade but want to be sure before I start. It seems to be the least expensive and most user-friendly to me.

"Best" is a problematic term. Scottrade is OK, E*Trade is OK, you can try Sharebuilder, Ameritrade, there are several "discount" online brokers and plenty of on-line reviews and comparisons amongst them.

What is a margin account and how would it affect my investing? From what I understand it comes into play when an investor borrows money from the broker.

Do I need to use it at all as I won't be investing on a big scale yet.

You understand right. There are rules to use margin accounts, and with the amount you have I'd advise against them even if you get approved. Read through the brokers' FAQ's on their requirement.

Should I keep adding money on a monthly basis to my brokerage account to give me more money to invest or keep it at a certain amount for an extended period of time?

Sharebuilder has a mechanism to purchase monthly at discounted prices. But be careful, they give you discounted prices to buy, but not to sell. You may end up with a lot of positions, and the discounts you've gotten to buy will cause you spend much more on selling. Generally, averaging (investing monthly) is a good way to save and mitigate some risks, but the risks are still there. This is good only for long term savings.

How should my breakdown my investments in terms of bonds vs stocks?

Depends on your vulnerability and risk thresholds.

Answer 2

Littleadv has given you excellent general advice, but to my mind, the most important part of it all and the path which I will strongly recommend you follow, is the suggestion to look into a mutual fund. I would add even more strongly,

go to a mutual fund company directly and make an investment with them directly instead of making the investment through a brokerage account.

Pick an index fund with low expenses, e.g. there are S&P 500 index funds available with expenses that are a fraction of 1%. (However, many also require minimum investments on the order of $2500 or $3000 except for IRA accounts). At this time, your goal should be to reduce expenses as much as possible because expenses, whether they be in brokerage fees which may be directly visible to you or mutual fund expenses which are invisible to you, are what will eat away at your return far more than the difference between the returns of various investments.

Answer 3

Most mutual funds are designed to make the investment banks that sell them money, not to make investers money. They do this by taking significant fees out. Because they make lots of money on these funds, they advertise them a lot, and give them important-sounding names, like "Advanced technology global diversity long term appreciation".

Index funds are the exception; they attempt to mirror the performance of a specific index (such as the S&P 500 index). They generally have very low fees.