Getting Started in Stock Investing

So this year the tax return fairy brought you $100, and you finally want to get started with investing the stock market.  Good for you!

A friend of mine recently posed a similar question to me about how he can get started in with investing with a small sum.  This, in short, was my answer.

The best way to get started in a hands-off way is to buy a stock or instrument that will closely mimic of the stock market as a whole.  Because the market as a whole has increased in value over the years, they best you can do is invest in everything.  Because you can’t do that, you’ll need to buy shares of an index or spider vehicle.  Here are a few suggestions:

• Vanguard Total Stock Market VIPER

• iShares MSCI-EAFE

• iShares Lehman Aggregate Bond

• iShares Dow Jones US Real Estate

• iShares Dow Jones US Basic Materials
• S&P 500 Spider

Now, if you’d like to take a little more hands on approach, I would recommend putting 50% of your available cash in one of the above vehicles.  This will help to ensure that you don’t lose everything.

To pick stocks for investment first make a list of companies you’d like to buy.   Once you have a list of 10-15 companies you’re interested in, head over to your favorite finance website (Yahoo! or Google are good choices) and look them up.  What you are looking for is a stock with a P/E ratio under or below 15.  This basically means that the stocks are undervalued compared to what the company earned in the most recent period.

(For a more in depth explanation of P/E ratios, see http://en.wikipedia.org/wiki/Pe_ratio)

Buy a few of the stocks on your list that meet the P/E requirement and hold them for 1 year.  At the end of the year check the stock’s stats again.  See if you think you’re going to make more money in the next 12 months, if not, wait for the opportune time to dump the stock.  If so, hang on to it!

Whenever you have some extra cash for investing, put half in the spider, and the other half in the next stock on your list.

Try it out and see how it works for you!

April 27th, 2007
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What is Microcredit?

Microcredit involves making small loans to persons who are not ‘bankable’ (meaning they could not get a loan from a traditional bank). This audience often consists of the very poor, unsuccessful entrpreneurs, or unemployed people.

Although the business models differ, there exist many non-profits that supply microcredit, as well as several businesses, and individuals.

Individuals seeking to begin lending in a microcredit situation need to be very careful about who they choose to work with, as it can very risky to invest in this market.

Some businesses exist to assist investors in making micro-credit loans. Often, these businesses provide aggregation and risk-sharing models. This means that if a person requests $10,000 in micro-credit, the business can split it up between 10 investors who each invest $1,000. This helps to spread the risk of deault around, meaning you can invest your money more widely. One such service is Prosper.com.

Non-profits have also shown much success in the micro-credit market. The common idea of success in this arena is that a poor person takes a loan to do something, and then ends up growing their business to employ other poor persons in their neighborhood.

One such example is a woman in India who took a small micro-credit loan to buy some fish from a fisherman at a local wharf. She cooked the fish and then sold it to others in the same area. She then repaid the loan and took the extra money to the wharf to buy more fish. Once again she cooked and sold the fish. After repeating this process quite a few times, she was able to buy her own fishing boats, which she now rents to local fisherman, for the price of bringing her enough fish to cook and sell.

Of course, not all stories can end like this, so do the proper due diligence when investigating this type of investing. Also, keep in mind that a non-profit such as this could make an excellent tax shelter should you find your income too high for your liking.

September 17th, 2006
Related Topics: microcredit finance (1)-