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How to start on Stocks

TetsugenTetsugen Registered User regular
edited August 2007 in Help / Advice Forum
I was curious if there are any book recommendations for someone who's planning to start playing the stock market from Canada ? I have no experience and would like to do some research.

Tetsugen on

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    FristleFristle Registered User regular
    edited August 2007
    Try starting with The Motley Fool.

    Fristle on
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    EggyToastEggyToast Jersey CityRegistered User regular
    edited August 2007
    You plan to "play" the stock market from no experience? I've got a bridge in minnesota I could sell you (MN native here). The stock market only seems easy in hindsight. Like, I should've bought a shitload of Apple stock when it was $30, but back then there was no way in hell I would've bought it.

    Seriously, a basic book on Finance would get you off to a very good start, and hopefully help explain why individual day trading on a per-stock basis is a poor idea. Generally, you purchase stocks as part of a portfolio in order to diversify your risk away. And you then use some moderately complex formulas based on past returns, as well as reading the annual reports of companies, in order to gauge what the future return on a company's projects will be. You then utilize that to create a healthy portfolio of stocks that will maximize your return while minimizing your risk, suiting your own investment criteria and risk/reward curves.

    If you just have some money you'd like to put on a stock, for shits 'n giggles, the general rule is to buy a company that you deal with on a daily basis. Of course, those companies are usually blue-chip stocks with low risk anyway.

    How much are you planning on learning, and how much are you planning on doing?

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    themightypuckthemightypuck MontanaRegistered User regular
    edited August 2007
    The trick to playing the stock market is getting in first or getting out first. You can do this by getting a) lucky b) being genuinely insightful, or c) having inside information. The last of the 3 can be a sticky wicket though. I'm speaking here of the short term game. For long term stuff, I think a good strategy is to play the game everyone else is playing. The reason for this is that the markets tend to be dominated by rare events and in this democracy, when a rare event fucks up enough people, the rest of us tend to pony up and bail those people out. (check out the whole Savings and Loan thing from the 80s). Likewise if you are betting on the apocalypse good luck getting paid when you hit the mark.

    themightypuck on
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    ThanatosThanatos Registered User regular
    edited August 2007
    If you're talking about trading with less than $10,000, just forget about it.

    And if it's $10,000 you can't afford to lose, don't do it, either.

    Thanatos on
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    FyreWulffFyreWulff YouRegistered User, ClubPA regular
    edited August 2007
    Start out by buying a couple of shares for a company you like.

    Also, you aren't limited to a specific market - you can usually buy shares off any market (for instance, I had my mom buy Nintendo stock a long time ago - it's since then quadrupled in price, but back then she bought it because she liked what they were doing)

    FyreWulff on
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    The Black HunterThe Black Hunter The key is a minimum of compromise, and a simple, unimpeachable reason to existRegistered User regular
    edited August 2007
    I remember playing a sharemarket game at school.

    Thousands of groups around the nation participated.

    Each group got $50.

    By day 2 only about 20% of the people were in a profit. We were $3 ahead.
    This continued for a while, then by about day 5 we were $47.50

    Research your companies and any future decisions they plan to make. you have to be really involved and know your shit, you would be better off investing in the low 3 digits. When you are comfortable go a bit further in.

    Hell, you'd probably be better of watching the currency exchange, i hear it's big in china.

    The Black Hunter on
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    ThanatosThanatos Registered User regular
    edited August 2007
    I remember playing a sharemarket game at school.

    Thousands of groups around the nation participated.

    Each group got $50.

    By day 2 only about 20% of the people were in a profit. We were $3 ahead.
    This continued for a while, then by about day 5 we were $47.50

    Research your companies and any future decisions they plan to make. you have to be really involved and know your shit, you would be better off investing in the low 3 digits. When you are comfortable go a bit further in.

    Hell, you'd probably be better of watching the currency exchange, i hear it's big in china.
    What you want to invest in is a mutual fund. They're basically pre-diversified portfolios of stocks.

    You only made that $3 initially because you didn't have to pay brokerage fees, which usually run from $8-$12 per trade. That means that if you invest $2500 evenly across 25 different stocks (25 stocks is what is generally considered the "safe" minimum number of stocks for sufficient diversity), you immediately lose $200. That means you have to pull in 8% interest over the first year just to break even. You have to pull in 13% interest in the first year to make as much as you could pull in with a very safe investment. This is, of course, assuming you don't sell or buy any of the stocks over the course of the year; then there will be more brokerage fees.

    Thanatos on
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    TreelootTreeloot Registered User regular
    edited August 2007
    The book you want to get is Benjamin Graham's The Intelligent Investor, the 2003 edition. Warren Buffet calls it the best book ever written on investing. The 2003 edition is actually an updated version of a copy from the 70s, Grahams tips on investing are all still very relevant today, and after every chapter there's great commentary by some dude who wrote for Forbes magazine. Before you get it, grab a small beginner's book about stocks, so you can learn basic terms like P/E ratios. While it's a great book, it's not for somebody totally new to stocks.
    Fristle wrote: »
    Try starting with The Motley Fool.

    I wouldn't trust the Motley Fool. Read about their Foolish Four debacle.
    Thanatos wrote: »
    I remember playing a sharemarket game at school.

    Thousands of groups around the nation participated.

    Each group got $50.

    By day 2 only about 20% of the people were in a profit. We were $3 ahead.
    This continued for a while, then by about day 5 we were $47.50

    Research your companies and any future decisions they plan to make. you have to be really involved and know your shit, you would be better off investing in the low 3 digits. When you are comfortable go a bit further in.

    Hell, you'd probably be better of watching the currency exchange, i hear it's big in china.
    What you want to invest in is a mutual fund. They're basically pre-diversified portfolios of stocks.

    You only made that $3 initially because you didn't have to pay brokerage fees, which usually run from $8-$12 per trade. That means that if you invest $2500 evenly across 25 different stocks (25 stocks is what is generally considered the "safe" minimum number of stocks for sufficient diversity), you immediately lose $200. That means you have to pull in 8% interest over the first year just to break even. You have to pull in 13% interest in the first year to make as much as you could pull in with a very safe investment. This is, of course, assuming you don't sell or buy any of the stocks over the course of the year; then there will be more brokerage fees.

    The stock market game isn't a very good simulation anyway because it only lasts for a few weeks. Most people who make money on the stock market don't do it through get rich quick speculation. From what I've read 10-30 stocks is generally a fine number to start investing with, although stocks alone shouldn't be your only investment.

    Investing in mutual funds can require just as much work as investing in stocks, because many mutual funds perform terribly. I don't know much about mutual funds, so the best advice I can give in regards to mutual funds is to pick one with a good long term record, and make sure whoever was managing it is still with it.

    edit: I didn't see you were Canadian, I hope my information is still helpful.

    Treeloot on
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    ThanatosThanatos Registered User regular
    edited August 2007
    Treeloot wrote: »
    Thanatos wrote: »
    I remember playing a sharemarket game at school.

    Thousands of groups around the nation participated.

    Each group got $50.

    By day 2 only about 20% of the people were in a profit. We were $3 ahead.
    This continued for a while, then by about day 5 we were $47.50

    Research your companies and any future decisions they plan to make. you have to be really involved and know your shit, you would be better off investing in the low 3 digits. When you are comfortable go a bit further in.

    Hell, you'd probably be better of watching the currency exchange, i hear it's big in china.
    What you want to invest in is a mutual fund. They're basically pre-diversified portfolios of stocks.

    You only made that $3 initially because you didn't have to pay brokerage fees, which usually run from $8-$12 per trade. That means that if you invest $2500 evenly across 25 different stocks (25 stocks is what is generally considered the "safe" minimum number of stocks for sufficient diversity), you immediately lose $200. That means you have to pull in 8% interest over the first year just to break even. You have to pull in 13% interest in the first year to make as much as you could pull in with a very safe investment. This is, of course, assuming you don't sell or buy any of the stocks over the course of the year; then there will be more brokerage fees.
    The stock market game isn't a very good simulation anyway because it only lasts for a few weeks. Most people who make money on the stock market don't do it through get rich quick speculation. From what I've read 10-30 stocks is generally a fine number to start investing with, although stocks alone shouldn't be your only investment.

    Investing in mutual funds can require just as much work as investing in stocks, because many mutual funds perform terribly. I don't know much about mutual funds, so the best advice I can give in regards to mutual funds is to pick one with a good long term record, and make sure whoever was managing it is still with it.

    edit: I didn't see you were Canadian, I hope my information is still helpful.
    It's really easy to take a look at a mutual funds performance, and judge what its future is going to be like. You can't do that with the stock market.

    Like, I've got my Roth IRA in two different mutual funds, two thirds in an international small-cap fund that's a rollercoaster ride, but lifetime averages about 14% a year (which is about what you should expect from a small-cap fund). The other third is in a "contrarian" fund, which means "we take some dudes and let them try crazy shit out." The lifetime return (and it has a fairly long lifetime) is about 18%, but it's a serious rollercoaster ride (it lost 40% in one year at one point). However, given my age, and the fact that it's a retirement fund, I want as much good risk as I can get.

    Thanatos on
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    ShogunShogun Hair long; money long; me and broke wizards we don't get along Registered User regular
    edited August 2007
    Mutual funds might perform badly at certain times, but they are still almost always guaranteed to provide some return, if not some good return. I might add that when the stock market crashed there were only four mutual funds in America. Every one of those funds survived said stock market crash. If you want a good simple fund, try a vanguard index 500. Not the greatest, but certainly not bad by any means. That fund sees good growth and is usually good about returns.

    Shogun on
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    TreelootTreeloot Registered User regular
    edited August 2007
    Shogun wrote: »
    Mutual funds might perform badly at certain times, but they are still almost always guaranteed to provide some return, if not some good return. I might add that when the stock market crashed there were only four mutual funds in America. Every one of those funds survived said stock market crash. If you want a good simple fund, try a vanguard index 500. Not the greatest, but certainly not bad by any means. That fund sees good growth and is usually good about returns.

    While most mutual funds provide some sort of return, about 80% of mutual funds fail to outperform market. It's not surprising that all four mutual funds survived the stock market crash, there had been signs of trouble brewing for months. Prices were far too high on most stocks, and people were far too optimistic.

    Treeloot on
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    Buddy LeeBuddy Lee Registered User regular
    edited August 2007
    Just a few basic things :

    1) Only use excess money. Don't use your lifetime savings to play the stock market. You'll probably regret it.

    2) Know what you're investing in. Understand the company that you're interested in and its market. Don't just pick a random one that people have been talking a lot about and invest in it.

    3) Be patient. Time is money, and if at some point your stock isn't looking too good, don't panic. Give it time to improve. In most cases, you'll be able to at least break even.

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    EggyToastEggyToast Jersey CityRegistered User regular
    edited August 2007
    Over time, any portfolio will fail to outperform the market. It's basic finance theory. If you're able to consistently beat the market, you are usually doing something illegal.

    After all, if you could consistently beat the market, the market would adjust in a way to match.

    The basic idea behind any mutual fund is to create a diversified portfolio of stocks in such a way that the return is maximized for a given risk level. As Than pointed out, if you're willing to accept more risk, you can sometimes earn a higher average rate of return. The thing with more risk is that you also may not.

    The only real problem with mutual funds is that in some cases, mutual funds are major stockholders in corporations, without a consistent voice for how they want any company run -- beyond higher returns. Since mutual funds are fickle in their allegiance in a lot of ways, that can be bad for the overall economy -- and thus, bad for the market which is risk you can't avoid. In a lot of ways, that's why "socially conscious" mutual funds tend to do well -- the managers of said funds do play an active role in the direction of the companies it invests in, encouraging smart growth instead of just a high rate of return at any cost.

    However, one major advantage to a mutual fund compared to individual investors is that mutual funds are run by actual financial managers who understand how the market is supposed to react, and won't do stupid things. Most investors are both risk averse AND loss averse. Therefore, they will invest too heavily in stocks that are seen as "sure things," without any appreciable advantages, and when a stock they're investing in posts losses, they will "ride it out" until it corrects, rather than realizing the loss (selling the stock) and investing in a current winner. It makes perfect sense -- if you invest $100, lose $10, do you keep doing what you're doing, hoping it gets better, or do you bail out, take your $90, and stick it somewhere where it's more likely to grow? Most people say "I don't want to lose that $10 in the first place," so you have a fair chunk of investors who will hold on to a losing stock for far too long.

    But the idea behind a mutual fund is the same as the basic theory behind portfolio management. If you're unable to hold about 40 stocks all on your own, you should probably consider a mutual fund of some sort, fitted to your financial needs at the time.

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    GigatonGigaton Registered User regular
    edited August 2007
    Thanatos wrote: »
    If you're talking about trading with less than $10,000, just forget about it.

    And if it's $10,000 you can't afford to lose, don't do it, either.

    Yeah, my dad tried off and on a couple of years. He then realized you usually have to have money to make money. However cliche that saying is.

    Gigaton on
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    ThanatosThanatos Registered User regular
    edited August 2007
    Buddy Lee wrote: »
    3) Be patient. Time is money, and if at some point your stock isn't looking too good, don't panic. Give it time to improve. In most cases, you'll be able to at least break even.
    Keep in mind that "breaking even" after a long period of time is the same thing as losing as much as you would have otherwise gained from a safe, sure investment.

    Thanatos on
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    Buddy LeeBuddy Lee Registered User regular
    edited August 2007
    Thanatos wrote: »
    Buddy Lee wrote: »
    3) Be patient. Time is money, and if at some point your stock isn't looking too good, don't panic. Give it time to improve. In most cases, you'll be able to at least break even.
    Keep in mind that "breaking even" after a long period of time is the same thing as losing as much as you would have otherwise gained from a safe, sure investment.

    Sure, I'm just saying that if you buy a stock at $30 per share and the stock plummets to $15 per share, then goes up $5 per share, it's a bad idea to decide to cut your losses and sell the stock at $10 less than what you bought it for.

    I hope that's not confusing to anyone...

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    DoodmannDoodmann Registered User regular
    edited August 2007
    I know this is a little off track but it seems like if you read up on what's going on in a particular industry its not too hard to make wise choices (as long as you realize there is a risk). For example my dad has some stock in some chip company Conexant or something and the stock has basically been shit the whole time he is had it so last year around May I told him to cut his losses and put it in Nintendo, of course he didn't and I make sure to point that out to him on a daily basis.

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    GlorfindelGlorfindel Registered User regular
    edited August 2007
    Thanatos wrote: »
    Buddy Lee wrote: »
    3) Be patient. Time is money, and if at some point your stock isn't looking too good, don't panic. Give it time to improve. In most cases, you'll be able to at least break even.
    Keep in mind that "breaking even" after a long period of time is the same thing as losing as much as you would have otherwise gained from a safe, sure investment.

    And what you lose in value to inflation. Always factor inflation

    Glorfindel on
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    TronTron Registered User regular
    edited August 2007
    You should read up on Stock Value theory investment strategy.

    Edit: Also, the trick to making it big with investments are:

    Knowledge- do your research or hire some one that does

    Diligence- Have an investment plan and stick with it.

    Time- Compounding and reivestment effects of stocks are what make it worthwhile.

    Short term gains with stocks are a fools' gambit

    Tron on
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    LykouraghLykouragh Registered User regular
    edited August 2007
    So let's say you have $10k to invest, and you could survive losing it very easily.

    Is there something besides a mutual fund or index fund that provides low risk but significantly more than 5% gain? If we're talking 5% I might as well just stick it in a CD and forget about it.

    Lykouragh on
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    SeptusSeptus Registered User regular
    edited August 2007
    My cpa friend has recommended to me that, for at least one of the mutual funds I plan on investing in for retirement, I should go with an S&P 500 fund. That is, the fund literally tracks that index and invests in all of the stocks there. The benefit is that it makes the expense ratio extremely low. Choosing a more focused fund will give you a higher expense ratio(1-1.5% seems normal) means that fund, in the long run, has to beat the market by that much, and I'm told that's extraordinarily difficult.

    Edit:
    Lykouragh wrote: »
    So let's say you have $10k to invest, and you could survive losing it very easily.

    Is there something besides a mutual fund or index fund that provides low risk but significantly more than 5% gain? If we're talking 5% I might as well just stick it in an ING Direct savings account and forget about it.

    I'm very glad that I got that recommendation from this forum, that savings account has over 5% and no minimum balance either.

    I don't think you're going to get much more than 5%, I think over the very long-term, a mutual fund isn't going to get you more than 9, maybe 10% return.

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    GanluanGanluan Registered User regular
    edited August 2007
    Septus wrote: »
    My cpa friend has recommended to me that, for at least one of the mutual funds I plan on investing in for retirement, I should go with an S&P 500 fund. That is, the fund literally tracks that index and invests in all of the stocks there. The benefit is that it makes the expense ratio extremely low. Choosing a more focused fund will give you a higher expense ratio(1-1.5% seems normal) means that fund, in the long run, has to beat the market by that much, and I'm told that's extraordinarily difficult.

    Both of my parents are CPAs, and they told me something similar.

    Right now both my wife and I have our 401(k) contributions invested in a life-planning fund, i.e. the fund manager actually shifts the contributions based on how far away you are from retirement. For mine (which is managed by Vanguard), 80-90% of it is placed in index funds, mostly on the S&P, until getting much closer to retirement. I'd take that as a pretty good indicator, considering Vanguard is no slouch in the industry.

    Ganluan on
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    EggyToastEggyToast Jersey CityRegistered User regular
    edited August 2007
    Inflation last year was estimated at around 2.5%, and the Fed rate is 5.25%. Earning about 5% is essentially the "risk free rate," as banks are offering it and T-bills are hovering right around 4.5% to 5.0%.

    If you want to increase your interest rate, you need to increase your risk. You can do that either through decreasing your liquidity (like a CD) or straight up increasing your risk (through mutual funds, portfolio investment, etc.).

    If you have a lump sum that you want to earn good returns on AND you don't care if you lose it, you should invest in a risk-oriented, high-return mutual fund. Why? Because if you wanted low risk, you WOULD care about losing the money.

    Basic portfolio theory is like this -- you have one stock with high risk that earns on average 20%, but could fluctuate from +200% to -100%. You have another stock that earns 10%, but fluctuates between +5% and +15%. You put $10k in both stocks, and reinvest all gains 50/50. Stock 1 earns 40% in the first year and stock 2 earns 5%, netting you 2250. You split that between both stocks, so they're now both at 6125. Stock 1 posts a loss of 20%, stock 2 posts a gain of 10%. At the end of year two, you have a total of 11637.5.

    Now, the average return on those two stocks over the 2 years is 8.75%. Ave for y1 is 22.5%, for y2 is -10%. If you simply invested in a riskless fund with a return of 8.75%, you'd only have 10875. If you had invested in two stocks individually, without sticking to your weights for reinvestment, you'd have only earned 11025.

    Because you're offsetting the risk of stock1 with the lower return on stock2, you usually earn more money in the long run. Note that it works best when you sell the stock after a gain in order to keep your portfolio well diversified -- you're not keeping all of your eggs in one basket that historically performed well. Rather, you're keeping your risk level the same, and reinvesting your gains, not just sticking on a lucky horse until the end of the race.

    So if you're willing to accept some risk, you can earn more money. But if you're not, stick it in a CD. If risk was a sure thing, it wouldn't be risk anymore.

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    ThanatosThanatos Registered User regular
    edited August 2007
    EggyToast wrote: »
    Inflation last year was estimated at around 2.5%, and the Fed rate is 5.25%. Earning about 5% is essentially the "risk free rate," as banks are offering it and T-bills are hovering right around 4.5% to 5.0%.

    If you want to increase your interest rate, you need to increase your risk. You can do that either through decreasing your liquidity (like a CD) or straight up increasing your risk (through mutual funds, portfolio investment, etc.).

    If you have a lump sum that you want to earn good returns on AND you don't care if you lose it, you should invest in a risk-oriented, high-return mutual fund. Why? Because if you wanted low risk, you WOULD care about losing the money.

    Basic portfolio theory is like this -- you have one stock with high risk that earns on average 20%, but could fluctuate from +200% to -100%. You have another stock that earns 10%, but fluctuates between +5% and +15%. You put $10k in both stocks, and reinvest all gains 50/50. Stock 1 earns 40% in the first year and stock 2 earns 5%, netting you 2250. You split that between both stocks, so they're now both at 6125. Stock 1 posts a loss of 20%, stock 2 posts a gain of 10%. At the end of year two, you have a total of 11637.5.

    Now, the average return on those two stocks over the 2 years is 8.75%. Ave for y1 is 22.5%, for y2 is -10%. If you simply invested in a riskless fund with a return of 8.75%, you'd only have 10875. If you had invested in two stocks individually, without sticking to your weights for reinvestment, you'd have only earned 11025.

    Because you're offsetting the risk of stock1 with the lower return on stock2, you usually earn more money in the long run. Note that it works best when you sell the stock after a gain in order to keep your portfolio well diversified -- you're not keeping all of your eggs in one basket that historically performed well. Rather, you're keeping your risk level the same, and reinvesting your gains, not just sticking on a lucky horse until the end of the race.

    So if you're willing to accept some risk, you can earn more money. But if you're not, stick it in a CD. If risk was a sure thing, it wouldn't be risk anymore.
    It's worth noting that investing in a high-risk fund over the short-term is pretty much universally considered a bad idea. High-risk funds are for long-term investments.

    Thanatos on
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    EggyToastEggyToast Jersey CityRegistered User regular
    edited August 2007
    Yup, which is another good point -- if you need the money soon, look for liquidity rather than interest rates. 4.5% to 5% on an online bank account that gives you nearly instant access to your money is fantastic.

    EggyToast on
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    themightypuckthemightypuck MontanaRegistered User regular
    edited August 2007
    WOW. I just noted that my 401k has had a rate of return of 16% since Jan 2004. I'm 100 percent in equities. 4 funds at 25% each. 3 are US and are doing OK but my Euro/Asia fund is kicking ass. I think that probably has something to do with USD tanking. I don't really pay attention to this sort of thing in the short run but I had no idea the market was doing so well. I suppose it will crash in the next few months now that I mentioned it O.o

    themightypuck on
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    DogDog Registered User, Administrator, Vanilla Staff admin
    edited August 2007
    Not to self whore or anything, but go to vanguard.com

    There is a ton of information on the site itself when it comes to 401ks, Roth IRAs, Mutual Funds, etc. etc. etc., and if you are serious about putting together a portfolio, or even just want more information about how something works, what kind of returns you are looking at over a period of time, call.

    I know a few other people have mentioned the company in the thread, but they do a great job. Just whatever you do, don't accidentally end up talking to someone in the creative learning department, we don't know anything about money.

    Ok, selfwhore off.

    Unknown User on
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