How can a small-time employee get a promising start in the stock market?
October 26, 2014 4:55 PM   Subscribe

For a small-time, late twenties employee working two jobs trying to make ends meet (and who knows next to nothing about the world of stocks and investing), how can he get involved in it without getting hurt?

Are there specific books, videos, and other resources that such an employee delve into? What kind of a financial plan can he hope to make? Penny stocks are recommended by many, but after "The Wolf of Wall Street", I'm scared to death. I want to know more about stocks, investing, how much to set aside from my income, whether investing online is safe or not, whether the money-making investments are too costly for a small-time employee to handle... I know that the world of investments is as predictable as a hurricane, but I want to learn as much as I can about the science aspect of it before it boils down to the risk part.
posted by cyrusw8 to Work & Money (19 answers total) 5 users marked this as a favorite
when i was younger, my financial advisor friend said, "first, save $2000 cash. then, we'll look at some options." ymmv.
posted by j_curiouser at 5:04 PM on October 26, 2014 [1 favorite]

I recommend the book A Random Walk Down Wall Street by Burton Malkiel for a general introductory overview of market and some basic principles. It has two chapters with more specific advice.

But in general, while investing in the stock market is safe in the sense that you are unlikely to be the victim of fraud, you can't get involved in it without some risk of losing your money. You can minimize risk by reducing your expenses and diversifying your investments. Index funds are great for this, because they allow you to own the entire market, or large segments of it, rather than individual stocks. Avoid penny stocks.
posted by AndrewInDC at 5:07 PM on October 26, 2014 [3 favorites]

Penny stocks are not a financial plan, they are gambling. Until you have sufficient savings in the bank you shouldn't be mucking around with stocks anyway. The only exception to that would be retirement planning, as you lose tremendous compound interest effects by not investing for retirement when you young. If you want to start saving for retirement open an IRA account at Vanguard. Then pick the retirement target date that corresponds to your age, and set up an auto transfer of whatever you can afford each month.

Then forget about about until you can afford to increase the monthly deposit.

Actually, Vanguard has a lot of good info on their website for beginning investors. So spend some time there reading.
posted by COD at 5:10 PM on October 26, 2014 [2 favorites]

Anything that can start with me with the nuts and bolts of how the system works before I'm thrown into the deep end?
posted by cyrusw8 at 5:11 PM on October 26, 2014

There is no secret really. At this scale, the best you can hope for is to track the market. As j_curiouser says, save $2000 cash first, then start saving in a tracker fund, then when you've got enough saved that you can lose a few thousand on a poor bet, split that amount amongst blue chip stocks of companies you've heard of who you personally feel have something special going on and when you feel they've lost that special thing, divest. Do this with big companies with a small proportion of your total savings and go on how you feel about how they're run rather than what you read, and you probably won't lose out too much on where you would be if that money was in an index fund, and if you do make any gains, you'll feel very good about them. But the prudent thing to do is put it in an index fund and transfer into bonds as you near retirement.
posted by ambrosen at 5:15 PM on October 26, 2014

Another alternative would be to look around for a local stock club--small groups of people pooling their money together to buy shares. BetterInvesting is a good place to start.

Most of these groups are as much about learning about the market as they are about profitability. If a stock pitched to the club doesn't pass for the group, it may be something you're interested in following.
posted by fifteen schnitzengruben is my limit at 5:31 PM on October 26, 2014 [1 favorite]

I wish this book was around when I started investing.
The Ivy Portfolio
posted by superelastic at 5:47 PM on October 26, 2014

Anything that can start with me with the nuts and bolts of how the system works before I'm thrown into the deep end?

I work a couple of part time jobs, one of which started an account for me with Fidelity Investments. Whenever I have questions or want to know how something works I can call them up and their level 1 customer support talks to me like I'm a child (which I appreciate). I like this system because the super-basic, really important stuff like retirement savings was all lined up for me; I literally just had to turn it on. From that basic start learning the other stuff as my curiosity dictated was pretty easy.
posted by carsonb at 5:50 PM on October 26, 2014

Penny stocks are recommended by many

Whoever is recommending you penny stocks, never take any financial advice from them again. Don't even bother with stock picking. Sometimes the conventional advice is right for a reason. Put your money in an index fund or ETF tracking the S&P 500. Don't try to time the market. Keep adding to it on a regular basis. You know, all the boring stuff that pretty much every website about investing for retirement tells you to do.
posted by pravit at 6:25 PM on October 26, 2014 [6 favorites]

+1 on buying and holding index funds. +1 on vanguard.

For most "joe public" investors, index funds are better than other mutual funds because:
  • You always track the market (you never do worse than the market index, but you never do better either). You might be tempted to aim higher than simply "tracking the market", but very few people can "beat the market", and even fewer can do it for the long term. This goes for you or me picking stocks, but also for "stock pickers" and "experts" running actively-managed mutual funds.
  • Index funds avoid capital gains taxes from "turnover" (you will pay capital gains tax when an actively-managed fund sells stocks).
  • Index funds have lower administrative fees than actively-managed funds because they're simple to manage.
The single resource for a beginning investor I'd recommend is the "bogleheads" wiki (inspired by Jack Bogle - the founder of Vanguard):
    "Bogleheads emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions. The Bogleheads principles are:
    • Live Below Your Means
    • Asset Allocation (Holding Bonds) Is Essential
    • Buy Low Cost Funds that are Widely Diversified
    • Tax Efficiency Matters
    • Stay the Course"

posted by sarah_pdx at 7:20 PM on October 26, 2014 [5 favorites]

Read Personal Finance for Dummies.

Don't try to pick individual stocks or other investments. Unless you become a full-time professional in the finance industry specializing in just a couple of stocks while working in a major financial center city in an office with the fastest possible connection to the latest market numbers, you are not going to be able to beat the market.

So what you want instead is index funds, which is like buying a little piece of "the market" in general. Just get a Vanguard Target Retirement Fund. Vanguard is a good, low-cost firm. You name the decade you plan to retire and they automatically adjust the mix of stock and bond index funds to the appropriate risk level for how many years you have left until retirement.
posted by Jacqueline at 7:31 PM on October 26, 2014

Buy a Vanguard index fund. Never take any kind of financial advice from anyone recommending penny stocks.
posted by ewiar at 7:41 PM on October 26, 2014 [7 favorites]

If Persinal Finqnce for Dummies does not satisfy your need to understand the nitty gritty of investing for normal people, continue on to Investing For Dummies by the same author.
posted by fief at 7:59 PM on October 26, 2014 [1 favorite]

Do this. TDLR here.
posted by Aizkolari at 7:59 PM on October 26, 2014

I don't think you can get involved in the stock market, meaning actually investing money, without running the risk of getting hurt.

However, you can set up mock portfolios on sites like Google Finance and buy penny stocks to your heart's content. To make it more real/serious, maybe set it up as a fantasy-football-type game where you're competing with other people, so you have to own up to your mistakes and feel some emotional pain, but without damaging yourself financially.

In general, stock investing is a serious personal challenge. It's not stupid like buying lottery tickets, since stock prices relate to the ongoing developing history of the real world and you can use your entire understanding of the real world in creative ways to predict them. You'll need to do a lot of research and make a lot of mistakes to learn this, unless you're going to go the simple route and buy Vanguard index funds.

Nate Silver has a chapter on the stock market in The Signal and the Noise (slnyt).
posted by kadonoishi at 7:22 AM on October 27, 2014

The graphic Aizkolari is pretty good. As a young person with no savings your priority is to get a stable emergency fund, 3 months expenses or so, before you do anything else. This is because you are at a greater risk of being laid off and have nothing to fall back on now.

If you want to get investing then take your money down to a TD Ameritade, Fidelity or Schwab office, saunter in and say you want to open a brokerage account.

Once you have your brokerage account you want to buy a safe bond fund because you are going to save your three months expenses in it and you don't want it to go down in price. Once reasonable choice is the exchange traded fund AGG, which tracks investment grade bonds (bonds which are pretty likely to be paid back in full on time) it is cheap and is unlikely to decline more than 5% or so.

If you buy stocks, even stock indexes, they can go down a great deal in a short period of time and you will sell at the worst time.
posted by shothotbot at 7:26 AM on October 27, 2014

You are asking smart questions. What you're looking for is financial literacy. Investments are part of managing your finances, the sexy part. But I bet you're also interested in saving money, taxes, and planning your finances for a life goal like buying a house or having kids.

The book that did that for me is Jane Bryant Quinn's Making the Most of Your Money. I was reading that 20 years ago, but the book keeps getting updated. Your library almost certainly has it. The Bogleheads wiki is also a good bet, they have several books as well.

When you are ready to make an investment, you will probably want to start with an IRA (I'm assuming you don't have an employer 401k). Vanguard is a good place to set up your first IRA and buy some low cost mutual funds.
posted by Nelson at 8:05 AM on October 27, 2014

cyrusw8: "Anything that can start with me with the nuts and bolts of how the system works before I'm thrown into the deep end?"

Yale recorded the 23 lectures given to students in their Financial Markets course. The professor is a fairly renowned fellow who helped build the first US housing price index. It gives a pretty decent overview of how everything works, and covers a bit of history, and uses a bit of math.

The main takeaway is that you should invest in a diversified portfolio, while reducing trading costs. For small investors, this usually means mutual funds tracking S&P500 and the AGG bond index. Mechanically, you'll want a tax advantaged plan. If you have a 401k, that's a good thing to look into. You should also look into an Individual Retirement Account (IRA). Both defer taxation until you withdraw money. I prefer Roth IRAs myself, which tax up front, don't tax later, and have some particularly useful bonus features, but this is something you can figure out later.

You may need some startup capital (savings) to properly fund an IRA. So if you don't have a few thousand saved up and ready to invest, that's your first goal. And if you review the materials everyone's mentioned now, by the time you've saved up enough to open an account and fund it monthly, you'll be in a much better position.
posted by pwnguin at 9:42 AM on October 27, 2014

Everything you need to know about investing in 128 words.


Scott Adams tried to get it published as a book ("anything more would just be padding"), but not surprisingly publishers weren't interested. So now you can read it for free.
posted by alms at 10:45 AM on October 27, 2014 [1 favorite]

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