To Find New Truth Shake Off Old Prejudice
Stock Market Video
In Case You Missed It
One of the most common questions I get from Cabot Wealth Advisory readers is how to invest with only a few thousand dollars. These readers are new to investing, and want to make the most of the small amount of money they have.
This is understandable-- after all no one wants to lose money. I also wonder if there's a perception tens of thousands of dollars is needed to invest before you're able to make big gains, but I'm not entirely sure of that.
Well here's the answer: You don't need lots of money to get started in the stock market. The higher the amount you begin with, the more you can diversify, but the amount of money you have to start is less important than you think.
Say you have $2,000 you're willing to invest.
There are a few ways you can move forward. The first is, of course, to hire a full-service broker or financial advisor from Merrill Lynch, Edward Jones or any of the other myriad financial services companies. This can be a good move, especially if you're short on time, but it's not for everyone--especially not if you're highly hands-on.
The second option, and one I suggest for the self-directed investor, is signing up with an online trading platform such as E*Trade, Charles Schwab or Fidelity. This allows you to make trades, without a phone call to someone who then makes the trade on your behalf.
Of course, using one of these trading platforms means you've got to find strong companies to invest in. You've probably already heard of a few companies with strong balance sheets, such as Microsoft (MSFT), Apple (AAPL) and Wal-Mart (WMT) among others. Some people, upon hearing these names, purchase the stock without a scrap of research, which is dangerous because you never know when a stock might hit a downturn.
Take Green Mountain Coffee Roasters (GMCR) for instance. For 13 years, the stock has consistently gone up. And then, on May 3, the stock dropped about 40% in after-hours trading--from 49.52 to 29.74 on news that their earnings missed estimates and they had a lower outlook for the next quarter. If you bought their stock on May 1...you could've lost a lot of money in only two days. In this case, Green Mountain's chart alone would have dissuaded you from investing in recent months. To be frank, the chart has been a mess.
There are two ways you can avoid losses like this, and make the most of your money. The first is through educating yourself on how to read a stock's chart and examine its fundamentals--earnings reports, etc.--so you're able to determine whether the upside potential is enough to outweigh the downside risk.
In fact, Cabot Market Letter and Cabot Top Ten Trader Editor Mike Cintolo recorded a video recently discussing how we choose growth stocks here at Cabot. It's highly informative on this very topic (click here to watch) and I definitely encourage you to take the time to watch it.
The second option is to subscribe to an investing newsletter that does all the research work for you, and then presents the companies able to offer the highest-possible gains. This is a very good option for someone who doesn't want to personally dig deep into company fundamentals before investing, but still wants direct control over where their money goes.
Personally, I advocate both options. Subscribing to a newsletter allows you to take advantage of the newsletter editor's experience picking stocks, while educating yourself on fundamental analysis means you'll be able to make an informed choice about whether to follow the newsletter's recommendations or not.
So with your hypothetical $2,000, I recommend the following course of action: Subscribe to an investing newsletter, read a few issues, and then pick two or three stocks to invest in. It doesn't have to be a lot of your money--10 shares of a $20 stock or 5 shares of a $40 stock is the same exposure after all--but having some skin in the game is better than none at all.
Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
To Find New Truth Shake Off Old Prejudice
What Frederick the Great originally wrote was, "The greatest and noblest pleasure which men can have in this world is to discover new truths; and the next is to shake off old prejudices." The condensed version says something different, though it's not bad. For investors, the truth is always valuable, and if you find it by shaking off old prejudice, so much the better.
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Editor, Cabot Wealth Advisory