"How can a teenager (11-17) start investing in the stock market?"

Question:

I'm a (11-17) year old student and I have some money I want to invest. How do I start investing?

Answer:

Congratulations on saving your money and trying to invest it!

In the United States, many US discount online brokerages, such as E*trade (www.etrade.com) require you to be 18 years or older.

So what you can do is ask your parents to open an account for you. One example is an Educational Custodial account. Your parents will control the account until you turn 18 or 21. Read the other requirements and benefits on the website:

There is also a Coverdell Account (formerly known as Education IRA), or an IRA for Minors (for your retirement!)

In the meantime, I recommend that you get your parents involved. Have them learn more about Investing. Both you and your parents should start by reading Investing for Dummies by Eric Tyson.

Once they open the account, you and your parents can decide how to invest.

For amounts $500 or less, you are better off choosing one good mutual fund (you purchase shares in a fund, and at the end of each day, the mutual fund price goes up or down, and you lose or gain money each day. After a period of time (for example, 10 years), you may decide to sell your mutual fund. At that time, you may have a profit (or a loss). The money is all yours now).

You can look at all the choices available in your brokerage account. If you use E*Trade, you can choose from among the more than 7000 mutual funds. Choose only mutual funds that are four or five start Morningstar.com rated and have no-load (you don't have to pay a special percentage to the brokerage when you either buy or sell), and no transaction fee.

Whenever you get more money, you can purchase more shares in the mutual fund. Look for either a good mutual fund that focuses on large US companies, or a diversified mutual fund that invests in international stocks.

If you have $1000 or more, you can choose to have fun. Are you interested in learning more about the stock market? You are young, and that means that you can take more risks with the money. Even if you lose it all, you'll have enough time to make it up in the future.

One good way is to continue reading about stocks and the stock market (Remember the Investing for Dummies by Eric Tyson book above?).

Then, as I mentioned before, get your parents involved. You can research stocks together. A good stock to research would be stocks you already know. Do you like McDonalds? maybe you can invest in "MCD". Do you like Games? Then consider Gamestop (GME). Of course, don't just buy it because you use the product. This is just a starting point. Research the stock!

Since you don't have that much money, just invest in one stock (or ETF, an Exchange Traded Fund. An ETF is a mutual fund that you buy and sell just like stocks) and just see how it goes up and down, and how what you do (for example, buy more Big Macs) affects the companies bottom line.

Also, watch "Mad Money" on CNBC hosted by former hedge fund manager Jim Cramer. Lots of those in Generation Y like him. He may sound a bit crazy on the show, but in reality, he as a very good hedge fund manager before he did the Mad Money show. (Video of Jim Cramer here.)

To be realistic, expect a market return of 10% per year over a long time. Of course, you can lose 40% in a year, or gain 40% of a year, for example. If you hold an individual stock, the stock will be more volatile. Don't be surprised if you go on a rollercoaster ride.

Good luck!

Credits

My own experience plus inspiration from Jim Cramer's article on teaching your children about investing.

"I have a Sum of Money to Invest. How do I invest it?"

Question:

I have a sum of money to invest. How do I invest it?

Answer:

Before you can think of investing this sum, let us go through these questions:

1. Do you have high interest rate credit card or card loan debt? For example, credit card debt greater than 10%? If so, you can use this money to payoff the debt. If you hold a balance on a credit card that charges you 15%, then if you pay off this debt, you are getting a 15% RISK-FREE return! If you invest in the stock market, expect to gain 8-10% average per year over a very long time (yes, you can gain 20% in a year, then next year, lose 10%), with risk. The better deal is paying off your high credit card debt.

2. Do you have a three to six month emergency cash fund in case you lose your income? If not, you may want to start that fund, by putting the money in a high yielding savings account (getting at least 5% at this time). If you have a safety net (such as having supportive parents), then maybe you can have a smaller emergeny fund.

3. Do you need the money within five years or less? For example, you need the money for a downpayment on a house. Then maybe you shouldn't invest the money in a stock market. You may want to put this money in a high yielding savings account as mentioned above. If you can take a bit more risk, and you don't need the money for 3 years (but need it by 5 years), you can look for a good no load, no transaction fee, Balanced Mutual Fund. A Balanced Mutual fund is a mutual fund that often has a 60% weighting in equities and 40% in bonds.

4. If you don't need to use the money within 5 years, then you can be more aggressive and go with a higher percentage of equities (stocks or stock mutual funds). The next question is whether you have saved at least $1000. If you have not saved at least $1000, start saving using a high yielding money market or savings account until you reach $1000.

5. If you have $1000 or more, start learning more about the stock market and investing.

6. Once you are comfortable with at least a primer on investing, Exchange Traded Funds (ETFs) and the stock market, you can now open a Brokerage account from brokerages such as E*Trade or Ameritrade.

7. Do you have between $1000 and $5000 to invest? Then I would recommend investing in diversified mutual funds or ETFs. ETFs are Exchange Traded Funds, or mutual funds that are often indexed, that trade just like stocks. For example, you can buy and sell DIA ETF from any broker. DIA represents the 30 stocks in the Dow Jones Industrial Average. One company which provides ETFs that are sold by almost any broker is Barclays Ishares.

A Sample ETF portfolio:

1. SPY: S&P 500 ETF representing approximately the largest 500 US Stocks.
   
2. IWM: IShares US Small Capitalization ETF representing the smaller capitalization US Stocks.
   
3. EFA: IShares International Developed Markets including Europe, Japan and Australia.
   
4. EEM: IShares International Emerging Markets including Korea, Taiwan, China, Mexico, Brazil, India, Russia.
   

8. Do you have at least $5000 to invest, and do you have the time an inclination to study stocks and learn more about the market? If you do not, then you can continue using the mutual fund and ETF strategy mentioned above.

9. If you have at least $5000 to invest, and you do have the time and inclination to study stocks and learn more about the market, then you can now invest in individual stocks. You have to continue reading and learning and go deeper in the recommended book list.

10. Once you've studied enough about individual stocks, you can aim to have a 5 to 10 stock diversified portfolio (as recommended by Jim Cramer in his Book, "Real Money: Sane Investing in an Insane World"). Each stock has to be in a different sector for true diversification. Expect to spend one hour each week studying each position. That's why it is difficult to have a portfolio of more than ten stocks because you won't have time to keep track. Of course, you can choose to have a mixed portfolio of ETFs and individual stocks. Also, if you can keep track of more stocks, you can have a portfolio of up to 20 individual stocks.

11. EXCEPTION: If you are very young (college aged or early 20s), and you have at least $3000, and you have the time and inclination to invest in individual stocks, then go ahead an invest in individual stocks. You are young and you can take more risks than someone who is close to retirement. If you only have $3000, you can start with three positions at $1k each, and as you save more money, you can continue adding money until you have a 5 stock portfolio.

12. NOTE ON COMMISSIONS: Be careful about commissions. If it costs you $10 to buy a stock, and sell a stock, then if your position is $500, then that means it costs $20 per $500 position, or $20/$500 = 4%. That means, for every transaction, you are spotting the market 4%! This is not acceptable. You should have larger position sizes but make sure that you have enough diversification (at least 5 stocks in 5 different sectors). The exception in point #11 above still holds.



Don't forget to continue reading and learning! I hope you enjoy the journey and make lots of money in the process.

How to invest $100 per month

Question:

Hello. I have $100 that I can save or invest every month.
How can I invest this?

Answer:

Good job saving $100 (or more) per month that you can save or invest.

1. What you can do is open a brokerage account such as:

1. E*Trade
2. TD Ameritrade

They offer many kinds of accounts, and you buy and sell stocks, and mutual funds. The minimum to open each account is $1000.

2. Then, choose a mutual fund with a minimum you can afford. Look through your brokerage mutual fund list, and only choose mutual funds that have no-load or no transaction fee. You can then visit Morningstar.com and look for 4 or 5 star mutual funds.

In order to have a diversified portfolio, you can have three mutual funds:
1. Diversified International Mutual Fund
2. Large Capitalization USA Mutual Fund
3. Small Capitalization USA Mutual Fund

If you don't have that much money to start with, you can start with one mutual fund. And as you have more money to invest, you can start investing in another mutual fund, and so forth until you have three mutual funds.

3. Setup automatic investing using your Brokerage account. You can automatically invest at regular intervals (for example, once a month), and the system will automatically invest for you whether the market goes up or down.

Over the years, with the growth of the stock market (on average, gains around 10% per year over many years. Yes, some years, you could lose 10% and other years, gain 20%), you'll be amazed how much money you can accumulate!


What if you don't have $1000 saved?

I was researching mutual fund companies to see if they allowed a very low minimum to start an account (such as $50). I wasn't satisfied with the results.

So what I recommend is open a high yield money market or savings account which, at this time, should get you at least 5%. Then when you have $1000, you can open the brokerage account and invest at regular intervals in mutual funds as described above. You can also open a Complete Savings Account at E*Trade (getting 5.05% at this time). Then, when you are ready to open a Brokerage account at E*Trade, you can link both accounts (your complete savings account and your brokerage account) to the same E*Trade login/account.

If you are interested in getting started in investing (mutual funds, ETFs, or individual stocks), you can try this link here.

High Yielding Savings Accounts

If you aren't getting at least 5% on your Savings or Money Market accounts, you are throwing money away.

To find the best accounts with the best rates, you can use the online resource: BankRate.com.

Each Savings account has special rules and minimum balances, so do be careful. In general (read the fine print carefully!), these Savings accounts are FDIC insured. You normally link your Checking account (from your current Bank, for example) with the Savings account, and use the internet interface to transfer money back and forth.

While you can make unlimited deposits, these Savings Accounts have limited number of electronic transfers out of the account. Most have a limit of six electronic transfers out of the account per month.

Some of these accounts have additional features such as having an ATM attached to the account, so you can withdraw money using a normal ATM (many have unlimited withdrawals per month).

Be careful about minimum balances and fees. While most may have no minimum balance and no fees (outside of a possible ATM withdrawal fee), some may have maintainance fees if your balance falls below a certain amount.

Here are a few recommendations ranked from the best:

• HSBC Direct. Currently yielding 5.05%. FDIC insured. No monthly fees, no balance minimums. Free linked ATM card. Has a hidden feature: In some states, such as in California, you can use a Wells Fargo ATM and not get charged a fee. High reliability.
  
• E*Trade Complete Savings Account. Currently yielding 5.05%. FDIC insured. No minimums or account fees. High reliability. You can also open many other accounts here such as IRAs or Brokerage accounts.
  
• Emigrant Direct. Currently yielding 5.05%. FDIC insured. "No Fee Savings Account". They have a Mastercard 1.40% cash back offer. During maintainance periods, site can be unavailable.
  
• GMAC Bank. Currently yielding 5.30% APY on balances over $500. There is a maintainance fee if your balance goes under $500. Minimum open deposit is $500.
  

Yields can change at any time, but at this moment, there are many ways to get a great deal on a 5% or greater Savings or Money Market fund.