Investing a little cash in something

Kazhiim

So, I've got something like fifty bucks I want to throw at the stock market, for no particular reason other than to see if I can make anything off of my savvy economic predictive ability.

The problem is, I have no idea how to give businesses my money in exchange for even more money. I know there are websites like e-trade that let you do this sort of thing, but I also know they charge fees and I'd like to minimize those. Is there a certain website that people use, or are they all pretty much the same, or what?

starmanbrand

Fifty bucks is not enough. You'll lose a large portion of that in just fees.

DrFrylock

In general, people buy and sell stocks and such things through intermediaries called brokers. A broker acts on your behalf as your agent, arranging trades.

In the old days, there were two kinds of brokers: full service brokers (who would provide advice, and would also make buy and sell decisions on your behalf without specific orders following a basic risk profile and your own conversations with them) and discount brokers (who would not provide advice and would simply execute whatever orders you asked them to). Brokers charge fees and commissions for their services, and discount brokers, providing less, charged less.

Both full-service and discount brokers still exist, of course, but now online brokers have largely taken over the segment of the market previously occupied by discount brokers. Online brokers are just like discount brokers: they do exactly what you say - no more, no less. Because computers do most of the work, the fees are substantially lower than even discount brokers.

In general, for small volumes of money/stock where you want to make your buying/selling decisions yourself, you can simply choose an online broker, open an account, and start trading. I won't recommend one over another, although I'm sure there are slight differences.

A couple things to be aware of in your situation:

1. Brokers will likely charge you when you make trades - when you buy or sell stock. So it behooves you to not buy and sell too much to minimize the amount of fees you're paying.

2. There are two kinds of orders you'll be basically concerned about: market orders and limit orders. A market order says "buy/sell X shares of stock S right now at whatever the going rate is." Because you never know *exactly* what the going rate is, market orders have some small element of risk that you'll end up paying slightly more than you think. I placed a market buy order after closing when a stock was at $4.25 once and it opened at $6. Oops. Market orders generally have the lowest fees at online brokerages.

3. The second kind of order you're concerned with is a limit order. A limit order says "buy/sell X shares of stock S when the price reaches $P." This incurs risk of a slightly different kind: that the transaction won't execute. However, if it does execute, you know exactly how much money you'll be spending/getting. Recall that stock isn't a magically fungible good - if you sell 100 shares, somebody else has to buy those shares, and vice-versa. So even if the reported stock price hits your strike price, you may not always be able to move those particular shares. But usually there's enough elasticity that it's not a problem. Limit orders cost a little bit more than market orders.

4. You also might be concerned about stop orders. A stop (or stop-loss) order says "if the price of stock S, that I own, drops to $P, sell it." This is a way to stop your losses if a stock price drops too low. So maybe you will buy 100 shares at $10, and put in a stop-loss order at $7. This way you'll lose at most $300 plus fees. I believe it costs a couple bucks to place a stop order at most brokerages.

5. There are different kinds of stock accounts. The most basic type (that you'll be concerned with) is a cash account. This is the simplest kind of account - you can buy as much as you can afford and that's it. Your basic mode of trading is simple: buy low, sell high. There are also margin accounts, in which the brokerage extends you a line of credit. These let you buy more stock than you can technically afford, by borrowing a portion of the total money. However, you're always liable for the full amount if things go bad - this is called a 'margin call.' This is not for novices. Having a margin account, however, allows you to sell stocks short.

Short selling is a way to make money if the value of a stock goes down. It's sort of weird how it works. Instead of borrowing money, you borrow shares of stock. So let's say you think that stock S, currently trading at $10, is going to go down. So you borrow 100 shares of stock S and sell them immediately, pocketing the $1000. But now you owe somebody 100 shares of stock S. You wait a week and, indeed, the price has gone down to $5. Now you buy 100 shares of stock S at $5 ($500 total) and return the 100 shares, now $500 richer. The reason you need a margin (i.e., credit) account here is that while the most a stock can drop in value is to 0, it can rise indefinitely. Let's say you're wrong and stock S instead rises to $50. Now you still owe somebody 100 shares of S, but it's going to cost you $5000 to get out of the hole.

6. Stocks are either bought and sold in multiples of 100 or blocks of < 100. Blocks of <100 are called odd lots, and may not be groupable with lots of multiples of 100. So a trade of 250 shares may be processed as a lot of 200 and a lot of 50 and incur double fees. Check your broker's policy.

7. Due to even the minimal trading fees of online brokerages ($10-20 per trade) the minimum amount you probably want to use for a cash account is about $1000.

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Trading stocks with a cash account can be fun and lucrative. If you have a lot of money, smart people will tell you to diversify. However, for smaller amounts, you can do quite well. I remember a family get-together at Christmas in the late 1990s or early 2000s. An uncle of mine who has a full-service broker was very happy about the 12% increase he got in his investments that year, which is a pretty good return. He knew I had a little money (about $5,000) in a cash account with a discount broker, and asked how I did that year. He was more than a little surprised when I told him that I made about 45%. His strategy: a complex portfolio of stocks, mutual funds, bonds, and high-interest savings accounts. My strategy: buy stock in the World Wrestling Federation at $10.50 and sell four months later at $15. Why the WWF? Because I knew the company. I was a fan at the time, they had just IPOed, the price had bottomed out (in my opinion), and I knew that it was peaking in popularity. If you're going to buy or sell a small number of companies, knowing them (from a business perspective) is an excellent idea.