How to best invest for the small investor?
With limited funds at ones disposal, say in the 10K to 40K range, what are the arguments for and against buying outright low price stocks to accumulate more shares than would be possible with higher priced stocks. Or, alternately, of using call or put options to purchase stocks of any share price?
Answers
3680 points
MNSL answered 10 months ago …
As a small investor
First and foremost, you must try to safe guard you initial money.
Do not gamble
Invest in investments that you know very well.
Look for other successful and big investors how they invest and trade
Do not think about buy and hold because you do not have holding power.
If you have, enough money for living then invest for the long run. Do not put you money on option and other instruments.
Invest in undervalued stocks with good management.
Do not invest in speculative shares because you will maker rich speculators while losing your money.
Try to learn as much as possible Otherwise, you will lose your entire money.
Try to learn how some big shareholders are manipulating shares to unload their holdings
This is happening in some markets. In addition, they will put up big orders in the order book to give wrong signal, as there are big demands for the stocks.
Try to learn basic investment ratio such as P/E, earnings per share first
781 points
jillybeansisme answered 10 months ago …
Whether you are a "big investor" or a "small investor" doesn't matter as much as you think, IMHO. Nobody likes to lose their money. Everybody needs the same general principles when it comes to investing.
Figure out your risk tolerance. The market is volatile. If your investment drops 10% will you be up nights puking your guts out into the porcelin throne?
Never put all your eggs in one basket. This means only 2%-4% in any one investment AND make your individual investments in different types of investments such as large cap value and medium cap growth. In order to get the biggest bang for your buck, you might want to look into ETFs (Exchange Traded Funds, i.e, many stocks in one particular area). I have absolutely no qualms about buying low priced stocks, but I keep them above $3.00. I will not get involved in stocks below that because they all to often disappear or appear to be pump and dumps. The important aspect is the integrity of the company. Does it have good growth potential, how is it in market share, does it have a good balance sheet, do you know what it is? Just because a stock is cheap does not mean it is a good buy. On the other hand, a more costly stock (and I don't mean Berkshire!) can also be a good investment if there is growth potential. I bought Potash Corp. at $85 and sold it at $200 (its high was $243+/-).
Have an exit plan whether the stock is losing or gaining in value. And have the discipline to stick to your exit plan. You can't be emotional about it (otherwise you fall off and get hurt).
READ! READ! READ!
Every investor's situation is unique. You give us little to go on. How old are you? What do you want the money to do (besides grow)? Is this money for retirement or is this short term money to buy a house or fund a college education? These questions aren't just being nosey. They determine how you invest. Most people should not day trade (a losing proposition unless you can be married to your computer and know well what you are doing, which you don't as a beginner). Most people should not invest in options, at least not until they are well educated. Same with commodities futures contracts. Just incredibly too risky. Mutual funds don't get a whole lot of return for the most part (Oh, Peter Lynch when you were at Magellan . . . what an exception to the norm!). That's why I suggested ETFs. They act like mutual funds but trade like stocks.
READ! READ! READ! Tickerhound is a great source of info. Look at the free investment newsletters (which have alot of advertising for all of their paid subscriptions, but ignore the ads). Don't pay for any investment newsletters until you've got a feel for what is going on because you could spend $thousands and $thousands.
3970 points
EthanR answered 10 months ago …
The number of shares purchased does not matter. It is the percentage of your return that matters.
If I buy 500 shares of a $10 stock, that's $5000 invested. If I buy 50 shares of a $100 stock, that's $5000 invested. Which stock is likely to go up the most? That's what counts. And usually, the higher priced stocks will outperform low priced stocks. Low priced stocks are not always followed by institutions, and they can be extremely volatile. So I would say stick with the higher priced stocks, and just buy fewer shares. They became high priced for a reason.
3680 points
MNSL answered 10 months ago …
jillybeansisme has given perfect answer.
I like to give attention to the jillybeansisme,s following statement.
I will not get involved in stocks below that because they all too often disappear or appear to be pump and dumps.
This is exactly right. I have seen in some countries, some so called top businessmen ( they called themselves as they are successful business men and investors) what they do is they buy not only low priced stocks but also the company director position as well.
Then they pump and dump their stocks. They think it is a good investment for them in the expenses of other investors. In short big money can manipulate the market.
If you buy low priced stocks try to sell them before others if you see them overvalued.
However there are some low priced stocks will become leaders in the future.
699 points
7million7years answered 10 months ago …
If you diversify your investments, then expect to get 'market returns' or less ...
... LESS to the extent of fees and the losses that you can expect from mis-timing the market. Of these, the fees are the reason why large investors (even 75% of Mutual Funds) perform less than the market.
But, it is the second - the market timing risks - that mostly affect smaller/individual investors: it's the reason why the Dalbar Study found that during a long period where the S&P 500 grew at an average rate of 11.9% 'smaller investors' only managed a paltry 3.9% return ... they would have been better off in CD's!
So, here is my suggestion:
A. If you want 'passive investments' and are satisfied with market returns (circa 9% AFTER inflation) then plonk your money in a low-cost S&P 500 Index Fund and let it sit until you retire ... add more as often as you can.
OR
B. If you want to become knowledgeable and want 'above average' market returns, then pick an investment that you can study up on and DO NOT diversify into that asset class (refer A. if diversification is what you want) and put all of your eggs into no more than 4 or 5 baskets (i.e. stocks or real-estate holdings) ... recognize that you ARE gambling-while-learning to get the higher returns that you crave.
C. If B. is not for you - or doesn't work out for you when you are only 'gambling' with small amounts - then refer to A.
That's it! :)
178 points
KenTrester answered 10 months ago …
Purchasing call and put options is the ideal strategy for an investor with limited funding because the cost of options is typically just a fraction of the underlying stock's price. Essentially, you're paying pennies on the dollar to control 100 shares of a stock per each contract you purchase.
Furthermore, while using call options is a great way to participate in a stock's upward movement, with put options you can make money when stocks decline, as well.
Stocks tend to fall more quickly than they rise, so put options should be part of nearly every investor's portfolio. The good news is that they're also typically cheaper than call options.
Buying options is just as easy as buying stocks, though many online trading platforms require that you apply for permission to trade them. Nearly all investors will be approved for "buying to open" options, so don't let this fact scare you away from using options as an easy and cost-effective way to profit from stocks.
289 points
CG answered 10 months ago …
Sorry to contradict, but I think for a newbie investor to get into options is just a faster path to losing his money. Most options expire out of the money.
Otherwise, some great advice above. I take exception to the idea that pump & dumps are cheap stocks though. Fannie, Freddie, Bear, Lehman, Enron, Worldcom, etc. etc.
As for newsletters, I doubt you'll find any that beat the record seen on my blog (but if there are any please let me know!) and it is completely free of avertising. Link in my profile. It won't teach you to trade or invest though. Only losing a lot of money will do that.
Good luck.
379 points
dustbusterz answered 10 months ago …
I like the answers on this question. However, I do have a Problem with MNSL 'S answer.
He states do not buy and hold because you do not have holding power. I have to say , in my own opinion, this is a bit short sited. Buy and hold does not necessarily mean holding forever. It merely means the plan is to hold forever, however, when you own stock, it is prudent to keep an eye on what you own. So,if at some point(say six months from now) that stock does not look as great or promising as it did when you first made your purchase, you will then of course, sell and move on to another promising stock. So Buy and Hold , is appropriate for anyone , even the small time investor.Does everyone agree with this? Or do we have some who have different feelings?
249 points
engcomp answered 10 months ago …
The big picture is bleak, see
http://www.tickerhound.com/questions/detail/20080912b4617d/a-simple-questi on
However, there will always be a bottom, after which there will always be a rise.
Take the advice of Warren Buffett - pay a fair price for a great company rather than a great price for a fair company.
How to tell a great company from a fair company? Do your homework!
212 points
jrj90620 answered 10 months ago …
I have to agree and disagree with some of the answers here.Read a couple of books by Peter Lynch.Find companies in businesses you know something about.The internet is an incredible tool for finding info on companies. Listen to company stockholder meetings and conference calls.I think buy and hold is your best bet.Think long term since most investors today are short term speculators.This would make you contrary and more likely to make a profit.It's a lot harder to make money short term than long term.Don't buy companies not making revenues now.No cheap speculations.I think you are better off finding companies whose stock is selling low if you have minimum money.Look for $5-$10 range.
Read more from jrj90620 flag as abuse great answer102 points
madhukar answered 3 months ago …
i am the small investor starting with 20k, for this amount which shares are best to buy. Bcoz i am the new one enter into this market. And also i need some suggestions that how to analyse the market.
Read more from madhukar flag as abuse great answer102 points
jonasbritto answered 3 months ago …
Some of my own rules
1. Big Picture : What is the potential for the global economy as a whole doing well 6 months down the line? If various global economists predict a turnaround for sure 6 months down the line (or if the economy will continue to go up 6 months down the line), then that is the best time to go long term.. buy not more than 6 stocks that are safe, cheap and are those sectors which will do well as part of the turnaround. However, I still feel its best to buy 2 to 3 Mutual funds itself... Buying individual is so much of a tension, its just not worth it... If a turnaround is nowhere in sight, or too far ahead in time, DO NOT BUY anything for the long term...
2. Volaitility : High Volatility is always an indication of a swing, either up or down.. mostly down.... When there is high volaitility, I feel options are great... but again, you need at least 3 months of experience to understand the game... Again, remember you pay a price for this... not just money, but loads of stress... so think again...
3. Gut Feeling : Somewhere deep down (after having done sufficient analysis on the web), you would tend to know when are things being overpriced and when they are dirt cheap... listen to your gut feeling... But remember to use this judiciously.
4. Increasing Stop Loss: Keep a strict stop loss. I would say 10% and that's it... Also, keep a target in Mind... Sell the ones that are doing badly over a period of time... vs the ones that doing well... Decide to sell at times when you think the market is overheated.. not necessarily the stock being overheated...
5. ITS A DIFFERENT MARKET today... Many of the principles of yesteryear do not apply.. Why? well, we are all traders now.. believe it or not.. the computer age has changed the way we invest... everyone wants a quick bang for the buck.. result? Dramatic lighening quick swings.... so remember that investing long term also needs to have an element of timing....
