Getting started trading.
June 17, 2011 11:33 AM   Subscribe

Help provide an early 20s female *complete* financial n00b with resources and information about stocks/mutual funds/hedge funds.... And how to grow a little pile of money successfully.

I am in my early 20s, and I know NOTHING about stocks. I have seen a few of my boyfriend's friends (in their early 20s as well) trading stocks on E-Trade, and realized that I wouldn't even know where to start, and that these guys were growing/losing/gaining (but probably on average growing) their pile of money into something, and here my money's just sitting in savings at account at the old bank earning a dime of interest a year (it seems).

I don't know the difference between stocks and mutual funds (I think mutual funds are investing in a large fund of stocks - so I guess you own a very very small portion of certain types of stock), I don't know anything about bonds (or why they're superior to stocks, or inferior, or when you should buy what), or what hedge funds are.

I'd like to get a really good solid education on these things, and then start investing after I actually know what I'm doing.

Could anyone here provide me with resources - a REALLY good resource for beginners - on these things? All the resources I've come across assume some sort of basic knowledge.

Then what happens - is a place like E-Trade a good place to start? Where else would be good?

I'm in my early 20s, have a professional job, and would be able to devote about $1,000-$2,000 to start, if that's enough?

Many many thanks for your advice and help
posted by Dukat to Work & Money (18 answers total) 57 users marked this as a favorite
You should start by reading the links and comments by MeFi's own Mutant, specifically with the section of his profile entitled "HOW TO BECOME A STUDENT OF THE MARKETS."

The short answer is "don't do it." There is a similar question and answer here.
posted by proj at 11:40 AM on June 17, 2011 [6 favorites]

Read this first: The best investment advice you'll never get, which was the advice given to Google employees before they all suddenly got very rich and the mutual fund salesmen descended on fresh meat. Basically: just buy an index tracker and get on with doing other stuff with your life.

The usual advice is that you shouldn't be investing in the market at all (including index trackers) until you have a few months salary saved in a regular account, so unless you have some regular savings on top of that $1000-2000 then you should probably wait.

Do not day trade.
posted by caek at 11:43 AM on June 17, 2011 [8 favorites]

I Will Teach You to Be Rich is a great book aimed right at people in your situation. There is also a website but the book is easier to dive in to.

Buying individual stocks is a suckers game.
posted by ChrisHartley at 11:44 AM on June 17, 2011 [1 favorite]

If you don't know anything about the market, the last thing you want to do is try to figure out individual stocks and bonds to purchase. You will be fine if you just put your money in an index fund, which is a mutual fund that tracks the general performance of the market as a whole. It may not give you the largest return, but it's relatively safe and uncomplicated. If you do end up wanting to learn more about the market and individual stocks, you can do that, but you can also just keep socking it away in index funds and not thinking too much about it - all of my retirement money has been in index funds since I started working and I'm doing just fine.
posted by something something at 11:53 AM on June 17, 2011

I just signed up for emails from DailyWorth. It's a daily email (including marketing/paid elements... so take them with a grain of salt) targeted specifically at women with minimal financial knowledge. It's not always going to be the meatiest of advice, but it helps me remember that, "Oh yeah, that should be on my radar."
posted by samthemander at 11:56 AM on June 17, 2011

Also, unless your boyfriend's friend is named Warren Buffet it is extremely unlikely that over time they will do better picking individual stocks on E-Trade than you will do investing a little money every month in a index fund. People always brag about their successes but never about their failures, nor about the per trade fees they pay. You could even be earning more then them with your risk free savings account.
posted by ChrisHartley at 11:58 AM on June 17, 2011 [1 favorite]

Chris Hartley's link is superb. Heed its advice.

Take a look at the names mentioned there--Malkiel, Bogle, etc.--and google them. Read up on what they have to say. Heed their advice.
posted by dfriedman at 11:59 AM on June 17, 2011

Sorry, I meant caek's link.

Though the book that Chris Hartley links to is good as well. But, really, read the link that caek links to.
posted by dfriedman at 12:00 PM on June 17, 2011

Smart and Simple Financial Strategies for Busy People by Jane Bryant Quinn
posted by John Cohen at 12:01 PM on June 17, 2011


Stocks are a way of investing in a company. Basically if a company does well the price will go up, and if they do not do well the price will go down. The current price represents how the market expects the company to perform, which makes it extremely difficult to predict which way a given stock will go unless you know secret information about the company. Overall though, companies make money, so the stock market as a whole tends to give a better return on investment over the long term than most other forms of investment.


Bonds are basically loans. A company or other organization asks for money, and you give them money, and they pay you interest over time. Bonds can be bought and sold, so their value can go up and down based on how likely the organization is to pay it back and how good the interest rate is compared to current rates. Overall they are a more guaranteed and stable form of return when compared to stocks, but with the downside of not having as high of returns.

mutual funds

Mutual funds can be made up of pretty much any kind of asset, which could be stocks, bonds, real estate, commodities like oil, etc. In general when most people talk about mutual funds they are talking about stock funds. One major consideration is whether the fund is managed or not, which means whether or not someone is actively picking particular assets. Index funds a popular type of non-managed fund, which try to match the returns of a particular type of diversified asset (such as, say, the overall US stock market) with as low costs as possible.

hedge funds

These funds are literally only available to millionaires, so don't worry about them.

I have seen a few of my boyfriend's friends (in their early 20s as well) trading stocks on E-Trade, and realized that I wouldn't even know where to start, and that these guys were growing/losing/gaining (but probably on average growing) their pile of money into something

For the amount you are talking about ($1000-$2000), this is a very bad idea. The best you can really hope for with stock returns is less than 10% per year, so if you make 10 trades at $5 over the course of the year you have already lost up to 5% of your investment just on fees. And aside from that, how are you going to decide which stocks to trade? Investment professionals can't pick which stocks are going to go up, so why would you be able to? Plus if you are only buying individual stocks, you are not very diversified, so if any unforeseen problems happen to those companies (think Enron) you could lose everything.

For most casual investors, putting your money into a simple index fund is probably a good idea. If you're saving for retirement, you want to be investing almost entirely in stocks right now since you have a long time to invest. There are funds like the Vanguard Target Retirement funds that will actually adjust your investments from stocks to bonds over time as you get closer to retirement. Also, taxes can put a big dent in earnings if you just use a normal ETrade account, so make sure to take advantage of any 401k plan your employer offers (especially if they offer a match, which usually gives you an instant 100% return up to a certain amount) and individual options like a Roth IRA.
posted by burnmp3s at 12:04 PM on June 17, 2011 [8 favorites]

I do investment advising, but what I write here in no way constitutes advice to you or others who read it.

As a general rule, you should have about 100k of funds to work with before you invest in individual stocks in order achieve enough diversity. People who use smaller amounts or trade often may enjoy the game of stock picking, but it isn't sound investment practice. For most people in their 20s the best deal going is their employers 401k plan invested into indexed funds. You get the best tax treatment, the lowest overhead costs, potential matching money from the employer and a pretty good incentive to not touch the money for a long time. It isn't sexy, but it works very well.
posted by dgran at 12:12 PM on June 17, 2011

definitely seconding caek's advice about not investing until you have some cushion socked away (i.e. make sure you can pay rent, eat, etc if something were to happen and you lost your income for a few months). Also, are you putting money into a tax deferred retirement plan like a 401K or 403B, or even an IRA? If not, do that first, before you invest directly.

to answer your questions:

A mutual fund is a professionally managed collective investment that pools money from many investors (i.e. people like you and me) to buy stocks, bonds, short-term money market funds etc. So it's a good way for an individual to diversify their investments (and spread risk) without buyuing lots of stocks and following the market obsessively. Heres the thing: most mutual funds have fees associated with them. So on top of te purchase commission charged by your broker (like Etrade or Ameritrade), you pay an additional fee to the money manager. and there's no guarantee that they'll beat (or even track) the market.

Consider ETFs instead. Trackers, less fees, similar performance (but do your research).

Hedge Funds are really availably only to wealthy people. Dont worry about it.
posted by darsh at 12:17 PM on June 17, 2011

You might feel better just looking for a better savings account. Around Chicago, MB Bank offers 4% on up to $10,000 (with some restrictions that you must have direct deposit, use the debit card, etc). I don't know if there are similar bargains around where you live, but national brick-and-mortar banks (chase, citi, etc) will tend to have the worst interest rates.
posted by a robot made out of meat at 12:31 PM on June 17, 2011

I'd recommend that you read Andrew Tobias's The Only Investment Guide You'll Ever Need. It's an excellent guide for beginners.
posted by russilwvong at 2:06 PM on June 17, 2011

caek is 100% right, and it bears repeating.
- People who know nothing about finance do not invest.
- People who think they know a lot about finance try to pick individual stocks. They get torn to shreds by commissions and on average get nothing out of it.
- People who are genuinely somewhat knowledgeable about finance simply buy a handful of "no-load mutual funds" and "index funds" (an index fund is a package of assets designed to more or less track the general market), and let their money grow in time with the wealth of the rest of the world.
posted by foursentences at 2:21 PM on June 17, 2011 [2 favorites]

I say don't sweat it. Research shows that men are more aggressive stock traders than women, and as a result any gains they have from trading are taken out by brokers. I think I saw the same paper show that men take on riskier (more volatile) portfolios, even though they don't outperform women. Those shows on CNBC "buy buy buy sell sell sell" I think represent dollar signs for the brokers who take out fees on every trade.

My point here is that you shouldn't look to these people as role models. You don't know how much they're contributing, or how much they've lost and not admitted. From most to least important, you should be building habits and learning about:

1. Saving
2. Investing
3. Trading

You can save your way to retirement under a mattress, if you desire. It's a significant amount of the total plan, and you'll never get anywhere without it. You've built up 2k of savings thus far, which is good. But make sure you're able to cover expenses, deductibles, emergencies blah blah blah before putting this away somewhere for years where you can't touch it. An important part of this step is to identify what it is you're saving for. Retirement is different than rainy days and down payments on a home. This will affect both what you invest in, and whether you can open a tax advantaged account for it.

Once you've got a savings bundle and cash flow, you can start investing. I strongly agree with the recommendations others here have made, that you should be picking low fee index funds. It's a very good default when saving for retirement. The best resource I've personally seen on investing is Shiller on Financial Markets. The only thing this course assumes is some familiarity with math, but those parts aren't essential to your needs. There's also a number of guest lectures you can skip, though I find them an interesting snapshot of the US economy just before the housing collapse. Their lectures take on a new dimension of intrigue if you view them with the knowledge of how they fared a year later. And Schiller's perhaps best known for building a housing price index, and publishing a book aruging the case for a dotcom bubble.

If you must trade, then the lectures above give you a good starting point but do not prepare you for things like reading balance sheets or SEC fillings. The simplest trades are just portfolio rebalancing: if bonds are up and stocks are down, sell some of your bonds at a profit and buy some stocks with the proceeds -- when the tides shift, you'll be better off. Personally I invest in a "lifecycle fund" that claims to do this for me over the years, but these are relatively new and I haven't seen much academic research into how they screw over investors. Another reason to trade might be major changes in your life. Perhaps you buy a house, and want to offset risks of it falling in price. Or perhaps a lot of shares in your employer finally vest, and you want to trade that for something more like an index fund.

Beyond that, your chief weapon in trading is information. Reacting faster than other people to news, applying personal insights to the valuation of a gigantic enterprise (that perhaps you're a customer of), etc. If this sounds daunting, it is, and it's why men trade more and do worse after fees.
posted by pwnguin at 4:50 PM on June 17, 2011

What everybody else said, with this addition:

(but probably on average growing)

Don't be too sure of that. I bet they wouldn't be trading stocks if it was easy and legal to bet that money on sports.
posted by holgate at 6:12 PM on June 17, 2011

If you are, as you say, a complete financial n00b, investing is not a great place to start. You need to get familiar with other money fundamentals, like managing your credit score, loans, savings plans, etc. I recommend Suze Orman's Money Book for the Young, Fabulous and Broke to get started.
posted by squasher at 3:20 PM on June 18, 2011

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