Since you are reading this article, let me assume that you have saved some money, probably in the neighborhood of $2000 and would like to grow it. I am also assuming that you don’t need this money right away. $2000 is good amount to start for investing, and you can find a trading platform compatible with what you have. I would urge you not to invest large amounts on day one. First learn how investing works, what kind of investing strategies can work for you and then you can gradually increase the amount over time. That way if one of your strategies backfires, you will not go broke.
I must also assume that this money that you would like to invest is “Risk-Free Capital”. By that, I mean even if you end up losing a part of it, your current lifestyle won’t take a hit. I always think that the market is after one’s money. If you don’t play it wise, chances are you’ll end up losing your hard-earned money. This gives me the energy and passion to stay at par with the market.
Let’s discuss some ideas for how to invest your money wisely:
1. Mutual Funds: You could put the money in four-five different mutual funds, and it would grow at 5-30% a year, depending on the kind of mutual fund you choose. Please note that past performance is NOT an indicator of future success in investing. So be very careful while choosing the mutual fund to invest in. Just because a fund has returned 30% in the prior year, 30% doesn’t become guaranteed return by any chance. In order to accurately judge a fund, you should examine the kind of instruments it’s investing in.
If your risk appetite is low, you should go for a more conservative mutual fund which will return maybe 5-10% annual return and invests in more large cap stocks or even bonds. Now, that’s not too much, but this is as far as conservative mutual funds (provided they accept such low amounts) can go. If you have the ability to take more risk and don’t need the money anytime soon, a good way to invest is the no load, no transaction fee, Mutual Fund. A Balanced Mutual fund is a mutual fund that often has a 60% weighting in equities and 40% in bonds.
2. Exchange Traded Funds: ETFs or Exchange Traded Funds are financial instruments that track index, or a bunch of mutual funds, and are traded just like stocks.
A Good Sample ETF portfolio that you can start with is shown below:
- SPY: S&P 500 ETF representing approximately the largest 500 US Stocks.
- IWM: IShares US Small Capitalization ETF representing the smaller capitalization US Stocks.
- EFA: IShares International Developed Markets including Europe, Japan and Australia.
- EEM: IShares International Emerging Markets including Korea, Taiwan, China, Mexico, Brazil, India, Russia.
Investing in indexes enables you to capture the broad market movement, which in the long run has an upward movement.
3. Stock Market: If you don’t want to invest in mutual funds and would like to have greater control over your investment, stick to individual stocks. With right stocks, your $2000 can give you nice returns (30-40 a year returns are not unheard of). While investing this way, you should look for a particular kinds of stock, a stock which is fairly young and has plenty of room to expand. You must also look at the record of the stock and the balance sheet of the company before finalizing. I am talking about a stock with price range $10-$20 per share. Once you have comfortably chosen a stock, the next step is to open a brokerage account with brokerages such as Tradeking or Zecco, that have zero minimum opening deposit. This way you won’t be wasting your valuable savings just to open an account.
If you are in college and have saved at least $2000, I would advise you to go and invest in the stock market. You are young and you can take more risks than someone who is close to retirement.
If you are going to invest in the stock market, often times, you would be confused which stock to pick. Best way to figure out which stocks to trade and decide how to invest is to network with the right kind of people who have extensive experience in the field.. You should take a look at TradeStreet, where you can subscribe to the trade ideas from really successful people, discuss your trade ideas with fellow traders, get their opinions before investing.
About the Author:
Punit Gupta is an entrepreneur and full time stock trader. Punit specializes in building startups by bootstrapping. Currently Punit is developing a brokerage comparison platform and a stock traders networking platform. Punit attended the Georgia Institute of Technology, Atlanta and worked with an Atlanta based startup for 7 years before quitting his job to start his own venture.