Money Mailbox – Where to Learn the Basics of Investing and Trading

by David Ning · 6 comments

Congratulations. You are starting to make some money and you are saving a good percentage of it every month. But now, you are wondering how to build wealth, instead of shoving all the extra cash at the bank and earning negligible interest. Welcome to the world of investing, where some build wealth while many others lose their fortunes.

Today’s question is from Gorro, who wants to learn more about investing, and trading in particular.

Both my wife and I are in a period where we are saving as much as we can each month. However, apart from having all our money in certificates of deposits, we are keen to learn how to trade. To date, we haven’t been able to find a comprehensive guide to trading and personally I am not a fan of buy and hold.

I have come across various books on technical analysis but they don’t seem to explain how we can invest in an index for example or what we need to know as beginners, which websites we can use for over the counter trades e.g. TradeKing, etc. We are looking for capital growth on our savings and earning a measly 3.5% per year is well….measly. We are not based in the US so we can’t follow every suggestion out there. We would be grateful if you could point us in the right direction.

First, Read and Learn

Though it’s going to take a bit of effort, the best way to learn is to first read everything you can get your hands on. Sites like thix one, and all major publications (Kiplinger, Motley’s Fool, etc) have investing advice you can look up and learn from. As you read everywhere, you will eventually stumble onto articles that talk about different options for index funds, such as a SPDR S&P 500 ETF (SPY) or the Vanguard Index Fund (VFINX) and learn what the difference a ETF and a mutual fund is. Other times, you will read on a few different ways to combat inflation. The information will feel shattered, but once you start putting what you learn into practice, every bit of knowledge will all start making sense and coming together.

Another seldom tapped resource is actually the brokerage websites. Whether it’s TradeKing or Scottrade, they all have their own learning center where you can read and watch power point like presentations to learn about everything from buying a stock to complicated options strategies. I highly recommend these, because they not only explain the definition to you but also show you how to execute the particular function within their interface. You may have to sign up for an account first, but it’s free, so why not?

How to Pick a Brokerage Firm

At the beginning, I dare say that any of the ones I’ve mentioned are good ones and you can almost choose any one. Picking a brokerage is much like everything else. The more you know about investing, the more articulate you are with your own preferences and the easier it is for you to pick the right brokerage for yourself. Every company has their perks. Some have a better interface, some have more functions, while others are cheaper. It all boils down to what is important to you based on your investing style. To start off, find a major player that offer a commission structure that you are comfortable with. Once you get started, you will know pretty easily whether you want to stay with your current broker or not.

One question you will need to know concerns whether you would like a margin or cash account. Essentially, cash account is one where you cannot borrow money, while a margin account lets you borrow money from the brokerage to buy securities that you don’t quite have the cash for. Also note that when you sell a security, it takes three business days for the transaction to settle. Until then, you don’t actually have access to your cash. If you want to trade with money you don’t have, then a margin account is the only way even though you aren’t technically buying more stock than what your account balance is. (It sounds confusing, but you will know what I mean once you start and get into it).

If Trading is Your Thing, Remember to Start Small

If you are set on giving trading a try, here is a bit of warning first. I don’t recommend it. I have outperformed the market indices, but I still choose to invest in index funds because of the safe but growth nature of such investments. If you still choose to go with the trading route, note that you will make mistakes, and you can lose a tremendous amount of money in a hurry if you are not careful. Start small, and feel your way around before you commit more capital. You will be tempted and end up with all kinds of reasons why you need to put in more money (for example, because commissions will be a smaller part of your trading cost) but the decision will probably be costly. Patience never hurts.

Use a bit of time with the limited amount of funds you set out with and get to know the interface of the brokerage firm by actually making trades. Eventually, you will get the rhythm of how everything works and only then should you increase your allocation. Otherwise, you will pay. Almost everyone does.

Keep Improving

Once you start trading, remember to keep reading and learning. Investing is a very complex industry that many companies make money on. Therefore, there are always new products and innovations ready for you to experiment with. As you gain more experience, you will be able to absorb the materials you read more quickly so everything will seem easier but the key is to keep learning and improving upon your investment strategies.

You will never get it perfect, but you will always get it closer to perfection.

Lastly, remember to have fun. Trading is much like a part time job. If you aren’t having fun, then the best thing to do is leave the trading game to someone else and just invest in index funds.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • Buy Groceries Online says:

    Before trading, I would recommend that people really invest in their financial education. Learn the terminology. Stocks are much ‘riskier’ when you don’t know what to look for.

    Read Robert Kiyosaki’s “Cashflow Quadrant” to learn how to invest in assets which product CASHFLOW, not in investments for capital gains (which are taxed at higher rate).

    I would really recommend everyone read his “Conspiracy of the Rich” book to see what has brought us to our current financial crisis, and learn how to prepare to protect yourself and to profit in the future.

  • Gorro says:

    Thanks for posting our question David as well as taking the time to answer. One question though, is there any reason you didn’t mention E-Trade. I know you have reviewed TradeKing and it’s the first I have heard of them.

    As to your suggestions, we’ll certainly take them on although it seems the more we learn, the more there seems to be the need to know what everything means. The only thing missing from all the articles and books we have read, is a step by step guide to trading and investing e.g. which broker to use, why use them, ratings, reviews, how best to use the tools they offer, etc.

    • MoneyNing says:

      Actually, Etrade has been my broker for a long time. They are great, with awesome research options and functionality. However, they aren’t the cheapest out there by a long shot because you have to “qualify” to get the $9.99, which is still double what TradeKing charges.

      Since I’m recommending you to not use a ton of capital to start, I would stick with a less expensive broker to begin with.

  • Peter says:

    The best tip here is to start small. Not many people are patient when they first start and everyone will make a ton of “rookie mistakes”.

    By starting out with little funds, you will pay less tuition. Also, with a set amount of funds (instead of always pouring in savings), you get a better sense of how well you are doing. Otherwise, you might be seeing your account balance go up even though you are making bad trades all the time since your contribution is much higher than the money you are losing.

  • Jenn says:

    Automatic investing in a diversified index funds is really the way to go. By adjusting your exposure to different industries instead of picking the right stocks, you will be beating the averages handily, which most traders nor mutual funds manager can do.

  • Stephan says:

    awesome post, thanks for all the tips, im 23 and am really trying to get into investing. i dont know if i want to actually trade stocks, as i see it as basically gambling, but i def do want to invest for my future and retirement more than just low yield CD’s that i currently have

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