 Personal Finance Powerpoint Presentation. Stock Investing Introduction. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia, how to start investing in stocks, a beginner's guide, which you can find online. Take a look at the references, resources, continue your research from there. This by Chad Landgager, updated March 14th, 2022. In prior presentations, we've been taking a look at investment goals investment strategies, investment tools, keeping in mind two main categories of investments, fixed income, such as bonds, and stocks or equity investments. The focus here on the stocks or equity investments, keeping that in mind, how to start investing in stocks, a beginner's guide. Investing is a way to set aside money while you are busy with life and have the money work for you so that you can fully reap the rewards of your labor in the future. So clearly, we would like our money that we are earning to not just be sitting in the bank, but hopefully growing so that they can be used at a later point. So a legendary investor, Warren Buffett, defines investing as, quote, the process of laying out money now in the expectation of receiving more money in the future, end quote. So we wanna be putting the money to work for us. The goal of investing is to put your money to work in one or more types of investment vehicles and the hopes of growing your money over time. Let's say that you have $1,000 set aside and are ready to enter the world of investing. So clearly, as we've seen in prior presentations, we first need to be thinking about how are we gonna free up the money so that we can invest. We have a lot of debt that we are dealing with. The question is, do we need to be paying off the debt first before we start investing once we free up the money so that we can put some of our cash flow into investing, then of course, the world of investing opens up and we've got a lot of questions to ask at that point. So, or maybe you only have an extra $10 a week and you'd like to get into investing. In this article, we'll walk you through getting started as an investor and show you how to maximize your returns while minimizing your costs. That's great. Buy low, sell high, that's my motto. What kind of investor are you? Before you commit your money, you need to answer this question. What kind of investor am I? When open a brokerage account and online broker such as Charles Swabs or Fidelity will ask you about your investment goals and what level of risk you're willing to take. So, when we think about our investment goals, we've talked about the investment horizon, how long we have for the investment process to take place, what our investment goals are such as retirement or some specific goal and then our personal risk levels as we pick and choose our investment strategies. Some investors want to take an active hand in managing their money's growth while others prefer a set it and forget it type of method. So, whenever we think about investing, we can say, okay, how much detail do I want to get into the investing? Do I want to be actively doing a lot of activity in the investing or do I want to set it and forget it? If I want to set it and forget it, do I want to do that by getting a managed brokerage account or possibly do I want to use something like index funds or funds that basically have a standard kind of ratio analysis and there's a lot of debate as to whether managed funds can beat the market and so on and so forth. So, we'll talk more about that. More traditional online brokers like the two mentioned above allow you to invest in stocks, bonds, exchange, trade funds, those are the ETF index funds and mutual funds. So, as we invest in stocks and bonds, the two categories note that we're often as individual investors using tools such as possibly investing in mutual funds, ETFs and using those tools. We've talked a little bit more about them specifically in prior presentations. So, online brokers, brokers are either full service or discount full service brokers as the name implies give the full range of traditional brokerage services including financial advice for retirement, health care and everything related to money. They usually only deal with higher net worth clients and can charge substantial fees including percentage of your transactions, a percentage of your assets and that they manage and sometimes a yearly membership fee. So, note that for lower income individuals it might not be worthwhile to get a very expensive portfolio manager. Obviously, as the income gets higher then a lot more complexity comes into play in terms of where the money should be put, how to diversify that money and also you've got a whole lot more like tax planning strategies that might be something that could be implemented at that level as well as estate planning which can also be a huge planning thing that isn't really there for the lower income individuals. So, it's common to see minimum account sizes $25,000 and up to full service brokerages still traditional brokers justify their high fees by giving advice detailed to your needs. So, you're always gonna, if you watch like investment TV and so on they're often interviewing full service brokers. Now, there's nothing wrong with that because they're in the business of investing. However, they're also obviously going to be advocating for their service as a full service broker. So, you'll often hear people asking them, well, do you really think that you're able to beat the market such that you can get a higher return than someone investing in say like just an index fund or possibly a 60, 40 split kind of mutual fund or something like that. And there's debates about that. Also just note that when you hear someone's track record about how well they have done then really you don't really know someone's real track record until you look at the life, their whole investment career because you might have had a 10 year spurt that you just happen to be there at the right time. An aggressive investor that happens to be there when it's good to be aggressive will look like a genius but that same aggressive investor when it's a time that is not suited for that much aggression will look not smart. So, it's kind of difficult to know what an investment's track record is without looking at their full life worth of track record. But in any case, we recommend the best products through an independent revenue process and advertise do not influence our picks. So, these are of course our investopedia picks and not my picks. I'm not affiliated with any of them at all here just given my advice on it. So, we may receive compensation if the visit partners we recommend read our advertised disclosure for more information. Again, that's from investopedia. So, here's what they got here. They got the fidelity investment category, best overall and best for low cost. So, the investopedia rating 4.8, account minimum zero, basic fees zero for stock, ETF trades zero plus 0.65 contracts. IT, Ameritrade, best for beginners and best mobile app. So, I don't personally I don't really like trading on a mobile app. I don't see that. But if you're trading a lot, maybe that would be something that could be beneficial for you. I tend to be more of someone who would like to think about the investing and not be doing day trading kind of thing because I think of a long-term kind of perspective on it. But in any case, 4.5 investopedia rating account minimum at zero and we've got testiworks best for options. So, options 3.8 on the investopedia rating. We got the interactive brokers, best for advanced traders and best for international traders and then Charles Swab, best for the ETFs. So, those are again, as investopedia ratings, I'm not affiliated with them. Take them with a grain of salt. Do your own investments. Take a look at the websites themselves and continue your research from there possibly looking at some of the references from the investopedia possibly. So, discount brokers used to be the exception but are now the norm. Discount online brokers give you tools to select and place your own transactions and many of them also offer a set it and forget it robo advisory service. So, when you're thinking about the advisory service you might be doing some of your own trading for example setting your own decision-making processes. Some of them now give you kind of what they call like the robo advice. They can kind of compile your data and give you a computer generated analysis of advice based on kind of best practices, the main heuristics which again, there's a lot of questions in terms of you might say, well, I want some individual advice but the question is always can the actual active advisors be basically robo advice at this point in time which hopefully is based on kind of best practices over a long period of time. So, as the space of financial services has progressed in the 21st century online brokers have added more features including educational materials on their sites and mobile apps in addition. Although there are a number of discount brokers with no or very low minimum deposit restrictions you may be faced with other restrictions and certain fees are charged to accounts that don't have a minimum deposit. So, you might find that some of the things that you want to investment in for example are gonna need like a minimum deposit in order for you to put the money in which is still way better than having to buy individual stocks and pay for individual brokerage fees in order to do so. Also note that if you are investing in multiple platforms you might think, hey, I'd like to have multiple platforms so that I don't have all my money in one place which can be nice but also it can be a little bit difficult to look at your overall picture in terms of your pie chart and what you're invested in that way. You might have some other kind of tools, investment tools, softwares like a personal capital has one I believe that can pull your investments together even if you don't have all your money in one area and help you to kind of get a pie chart in terms of how much is invested in bonds, what kind of different stocks and so on and so forth. So the managing of your investments can get a little bit tricky. There's different tools. We might dive into that more in the future presentations. So this is something that investors should take into account if they want to invest in stocks. So we got the robo advisors after the 2008 financial crisis a new breed of investment advisor was born, the robo advisor John Steen and Eli Bravernmourn of Betterment are often credited as the first in the space. So their mission was to use technology to lower costs for investors and streamline investment advice. So we've got the wealth front. So these are again, investopedias, robo advisors, wealth front. So category overall best overall best global and you've got the betterment and then the interactive investors. Again, you can look at investopedia for more references from there. Take a look and do your own research about them. We've got the M1 finance. We've got the personal capital, Merrill guided investing and then good old E-Trade. So since Betterment launched, other robo first companies have been founded and even established online brokers like Charles Swab have added robo like advisory services. According to a report by Charles Swab, 58% of Americans say they will use some sort of robo advice by 2025. So if you want an algorithm to make investment decisions for you including tax loss, harvesting and rebalancing then a robo advisor may be for you. So if you can compile all your data which can be difficult if you have multiple different places that different financial institutions but you could use tools to compile them then the robo advice can use general heuristic kind of tools to give you an idea of what the average investment should be given your age range and risk tolerance and so on and possibly give you some advice in terms of tax strategies based on that information as well. So also as success of individual investing has shown you might do better with a robo advisor if your goal is long-term wealth building. So if you're putting your money away for retirement and you're not like trading all the time then that might be a better, that the robo advice might be good because that's what it's designed to do. It's basically saying for long-term this is the idea. If you're trying to beat the market in the short-term then again there's questions in terms of how can that possibly be done. Obviously you're gonna need someone that's an active manager that they can possibly do that. And even then again the question is can they do that in such a way that even it'll extend over and above the fees they're gonna charge for it? So investing through your employer. So if you're a tight budget try to invest just 1% of your salary into the retirement plan available to you at work. So many people start their investment by having a retirement plan like a 401K or a 403B. These are huge tools you wanna take advantage of because if you put money in there you might get a matching benefit on it as well as a tax benefit for it. So obviously you need cash flow to be able to do that. So but it's a huge benefit to be able to put that in. Now that's just kind of like an umbrella over normal kind of investments. They're usually investing in stocks possibly in the form of mutual funds or ETFs that are under the umbrella of a retirement account like a 401K 403B or you could do a similar thing in an IRA and that umbrella is allowing you to get kind of tax benefits. But the investments are the same kind of investments that you can have outside of the umbrella. They're just more restricted once they're in that umbrella. The reason you restrict them is to get a tax benefit. So the truth is you probably won't even miss a contribution that small. So work-based retirement plans deduct your contributions from your paycheck before taxes are calculated which will make the contributions even less painful. Once you're comfortable with a 1% contribution maybe you can increase it as you get annual raises. You're likely to miss the additional contributions if you have a 401K retirement account at work then you may be investing in your future already with allocations to mutual funds and even your company's stock. So minimum to open an account. So how much does it cost to get rolling on this thing? Many financial institutions have minimum deposit requirements. In other words, they won't accept your account application unless you deposit a certain amount of money. Some firms won't even allow you to open an account with a sum small as $1,000. So it pays to shop around some and check out your broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. So some firms do not require minimum deposits. Other may often reduce costs such as trading fees and account management fees if you have a balance above a certain threshold. So these fees obviously the companies are gonna want you to be putting more money into the accounts. They would like to hire net worth individuals, lower net worth individuals, although they would like them are often more costly because they're more likely to kind of be bouncing around possibly and so on and they don't have as much money in there. So as you put more money in, you might be able to maximize or reduce some of the fees involved. So you wanna keep that in mind when you're thinking about what types of investments you're going towards, look at the fees. So still others may offer a certain number of commission free trades for opening an account. Commission and fees as economics like to say there aren't no such thing as a free lunch. There ain't no such thing as a free lunch. So nothing is free because there's always opportunity caused from an economy or an economist's standpoint. Though many brokers have been racing recently to lower or eliminate commissions on trades, the ETFs offer index investing to everyone who can trade with a bare bones brokerage account. All brokers have to make money from their customers one way or another. In most cases, your broker will charge a commission every time you trade stock either through buying or selling, trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge new trade commissions at all but they make up for it in other ways. There are no charitable organizations running brokerage services. So obviously we're talking about business here. We're not talking about charities. Even charities are in it for the money. I mean, give me a break because they still have to be efficient, right? They have a goal they're trying to reach but they've got to make that goal efficient and they've got to do that by basically paying their employees. Employees are still making money and we know the government is in it for the money, right? The government's not gonna be free. So it's good that it's a business looking for money but you got to be understanding that and hopefully they're gonna lower their costs by being more and more efficient and competing with other businesses. So depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a small account of money available to invest. So usually most small investors are here for the long haul. You're putting money away for retirement. If you want to do the day trading kind of thing, that could be a more costly kind of thing and you're probably in more of a gambling situation for a typical investor. So you might want to put some money aside that you're willing to lose to kind of play with it in that case and that could be good because you get a better feel of how to make trades and how everything works. But from a short-term perspective, an individual investor beating the market would be a difficult type of thing. But in any case, remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades and you will be charged for each one. Now imagine that you decide to buy the stocks of those five companies with your $1,000. To do this, you will incur $50 in trading costs, assuming the fee is $10, which is equivalent to 5% of your $1,000. If you were to fully invest the $1,000, your account would be reduced to $950 after trading costs. This represents a 5% loss before your investment even have a chance to earn. So should you sell these five stocks, you would once again incur the cost of the trades, which would be another $50. So to make the round trip buying and selling on these five stocks would cost you $100 or 10% of your initial deposit amount of $1,000. If your investments do not earn enough to cover this, you have lost money just by entering an exiting position. So mutual funds loads. Most people that start investing, small investors are gonna be using mutual funds and ETFs. So besides the trading fee to purchase a mutual fund, there are other costs associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in focused manner, such as large cap US stocks. So you may also have like index funds, for example, which have less management kind of costs because they're based on averages of the market, which is another kind of thing you wanna consider. Do you want a mutual fund, which will have someone managing the fund? And do you want that person to have more control over how they manage it? Or do you want them to restrict them by having them tie it to an index, which should lower the costs of the person managing the fund because they're now just tying it to an index. So the investor will incur many fees when investing in mutual funds. One of the most important fees to consider is the management expense ratio, the MER, which is charged by management team each year based on the number of assets in the fund. So you can look at how costly it is on a ratio basis and do some comparisons. The MER range from 0.05% to 0.7% annually and varies depending on the type of fund, but the higher the MER, the more it affects the fund's overall returns. So you may see a number of sales charges called loads when you buy mutual funds. Some are front end loads, but you will also see no load and back end load funds. So be sure that you understand whether a fund that you are considering carries a sales load prior to buying it. So check out your broker's list of no load funds and no transaction fee funds if you want to avoid these extra charges. For the beginning investor, mutual fund fees are actually an advantage compared to commissions on stocks. This is because the fees are the same regardless of the amount that you invest. So it could be a little bit easier because you know exactly what the fees are based on your investment for the mutual funds. Therefore, as long as you meet the minimum requirement to open an account, so some mutual funds will have that minimum amount you have to put in, you can invest as little as $50 or $100 per month in a mutual fund. So you can put more and more money into the mutual fund in pretty small increments once you have bought that initial base, which usually has a minimum amount to start. So the term of this is called the dollar cost average, the DCA, and it can be a great way to start investing. Diversify and reduce risks. Diversification, as we talked in prior presentations, is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment's performance severely hurting the return of your overall investment. So when you start watching like stock investment channels and whatnot and they're giving you advice, it's funny how many different words they have for simply diversification because that's kind of one of the golden rules that you're gonna want, you wanna be diversified. So you could think of it as financial jargon for don't put all your eggs in one basket would be the idea. In terms of a diversification, the greatest difficulty in doing this will come from investments in stocks. As mentioned earlier, the cost of investing in a large number of stocks could be detrimental to the portfolio. So when you're investing in individual stocks, it's harder to diversify because you're buying individual stocks. It's easier for small investors at least to diversify by investing in things like mutual funds and ETFs, which the funds are gonna help with the diversification process. So with a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio. So be aware that you may need to invest in one or two companies at the most in the first place. This will increase your risk. This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a larger number of stocks and other investments within their funds, which makes them more diversified than a single stock. Stock market stimulators. People new to investing who wish to gain experience trading without risking their money and the process may find that a stock market simulator is a valuable tool. So there are a wide variety of trading simulators available, including those with and without fees. So you can kind of practice with a simulation tool, which is pretty neat kind of thing to play with. So Investopedia Simulator is entirely free to use. So you can take a look at that one. Stock market simulators offer users imaginary virtual money to invest, quote, invest, end quote, in a portfolio of stock, options, ETFs, and other securities. This simulators typically track price movements of investments and depending on the simulator, other notable considerations such as trading fees and dividend payouts. Investors make virtual quote trades, end quote, as if they were investing real monies and kind of practice. Through this process, simulators users have the opportunity to learn about the ins and outs of investing and to experiences the consequences of their virtual investment decisions without running the risk of putting their own money on the line. Some simulators even allow investors to compete against other participants providing an additional incentive to invest thoughtfully. So it's kind of like one of those online games or sports games or whatever where you're trying to compete with each other, you can do that with the stocks. So what is the difference between a full service and a discount broker? Full service brokers provide a broad array of financial services including offering financial advice for retirement, healthcare, and a host of investment products. They have traditionally created a high net worth individuals and often required significant investment. Discount brokers have a much lower threshold for access but also tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades and also increasingly offer additional tools and other resources. What are the risks of investing? Investing is a commitment of resources now toward a future financial goal. There are many levels of risk with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk. It is always possible that the value of the investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals without they short term or whether they're short term or long term. How do commissions and fees work? Most brokers charge customers a commission for every trade. These tend to range anywhere up to about $10 per trade. Because of the cost of commissions, investors generally find it prudent to limit the total number of trades that they make to avoid spending extra money in fees. So certain other types of investments such as exchange traded funds carry fees in order to cover the cost of fund management. So what's the bottom line then? It is possible to invest if you are just starting out with a small amount of money. It's more complicated than just selecting the right investments, a feat that is difficult enough in itself. And you have to be aware of the restrictions that you face as a new investor. So you'll have to do your homework to find the minimum deposit requirements and then compare the commissions to those of other brokers. Chances are that you won't be able to cost effectively by individual stocks and still diversify with a small amount of money. You will also need to choose the broker with which you would like to open an account.