Most of my work on "A Dash" is written for the individual investor who is trying to make sense out of conflicting information. I am delighted to get responses from other financial advisors and from sophisticated investors with alternative viewpoints. Meanwhile, I also get occasional messages from another group – people who are just getting started in the investment world.
In fact, some of my best clients were people who asked the question, "How do I get started?" and began with a small program. There is nothing like having an actual investment to focus your attention. In our office Feray Alin handles most of our routine investor contact (in addition to several dozen other things). We share a sensitivity to client needs. She recently wrote a nice summary of how to get started. I would like to share it via "A Dash." Perhaps some in our audience will add some suggestions.
Step One: Look at your spending – not an online form budget (these rarely include everything). Look at all of your expenses for the last 12-24 months and figure the total for one month on average, then add a little extra for the months where you spent more and configure that into your monthly expenditures.
Step Two: Calculate your monthly base income. If you work extra hours some months and not others, do not include these (save these for the months where you spend more – i.e. major holidays, months where everyone seems to have a birthday, etc.) The extra pay needs to go straight into a savings account to be used in those months of high expenditure.
Step Three: The difference between Step One and Step Two is what to do with that extra money. It depends upon each individual and what exactly that dollar amount is – could be $10, could be $50. If you have $10 or $50 extra a month this should go straight into a savings account, saved over time to build up and open up your very own IRA account. Why? Because if it is in your checking account, you will most likely spend it. You should open up a retirement account, build and save for when you cannot and do not want to work anymore.
Step Four: Look at the companies that you and those around you like and use every day. What are the companies that have a long life? What are the companies that will be here in 10+ years? What companies have made it through the hard times? What do you see around you? Pick a company and research it. Remember to diversify. Don't own only one stock or several stocks in the same sector. For example, you wouldn't want to own three cell phone stocks.
Step Five: This is the hardest – the financial part of the process. What is the value of the company? What is the growth of the company? What is the sustainability of the company? What are the dividends? What is the VALUE of the company? What is the FUTURE VALUE of the company?
Former hedge fund manager and current host of CNBC's Mad Money Jim Cramer says: "Do your homework… we should be spending at least one hour per week researching every stock that we own". This is sound advice and one of the hardest for an individual…one hour per stock per week. If you own ten, this ends up being ten hours of your time per week. And yet, you need to know what is happening – if you want more than interest in your checking/savings account with or without an advisor, you need to do the homework.
Step Six: Cost Basis. Keep a list of the stocks that you own and the price you paid. You need to recognize and keep an eye out for a stock that is performing abnormally (good or bad) and learn why. If you are investing $1000 per stock, keep in mind that some stocks may be too high and may not give back enough to you (profit) to make it worthwhile.
(Price of stock (share price) x the # of shares bought) + the trading commission = your cost to buy the stock
(Price of stock (share price) x the # of shares bought) – cost – trading commission = Profit or Loss
I am going to use two financials. These two stocks have a large difference in their stock price and are good examples as to why the price of a stock needs to be a part of your choice. The first line in each table is the initial cost: $996.69 for Citigroup and $971.39 for American Express.
Citigroup (C): at $3.90/share with a $1000 to use, you can buy 253 shares. I have the stock price going up by 10 cents.
American Express (AXP): at $41.80/share with a $1000 to use, you can buy 23 shares. I have the stock price going up by 10 cents.
Citigroup, Inc. can go up $0.50 and make $100 gain. American Express has to rise $0.90 before you gain $1 and over $5 to gain $100.
Step Seven: Make sure that when you are starting out, you are using money that you can afford to lose. You will have gains and losses. Keep an idea of what the target price that you want to sell your stock and the timeframe in which you want to accomplish that goal. Don't be greedy; do not stay in a stock because you want to see one more rally in price. Keep looking at the financial statements and determine at what price you would sell, and if nothing changes financially within the company, sell it.
We would like to close with a quote by prominent investor Warren Buffett:
"Risk comes from not knowing what you're doing."
Remember always that trading is a learning process. It will take time before you can become an experienced investor.
Feray Alin, NewArc Investments, Inc.