Morning! Today I welcome back Derek Sall from LifeAndMyFinances.com, for the second installment of our investing series. You can check the first post, Investing-What is the point? where Derek talked about the importance of investing, even in small amounts. Today, he explains how to start investing.
Do feel like you’re ready to invest in your future? That is a huge step! Before we jump into stock trading though, let’s just be sure that you are prepared for the ups and downs of life (and the market).
How Big Is Your Emergency Fund?
Investing in the market can be risky, so you should first have an emergency fund in place should things go wrong in the market or at work. The standard for emergency funds should be about 6 months of your necessary expenses. If your expenses total up to $2,500 per month, that means that you should have $15,000 set aside in the event of a catastrophe. Rule number one, keep this money out of the market. Your emergency fund should not be tied up in investments, it should be readily available within 24 hours of your emergency. If you have your fund in place, then it’s time to invest.
Editor’s note: I disagree with Derek on that one, my emergency fund is kept to a strict minimum to try and build more wealth investing. That is risky though and if you are risk averse, you should listen to Derek!
Broker or Online Brokerage?
Many people wonder if a broker is truly worth the expense. This largely depends on your expertise in finance. If you went through college and got a degree in criminal justice or judicial law, then you are most likely not equipped for investing on your own. If, however, your degree was in finance or investing, then you most likely have the education to make trades and decide your financial roadmap on your own. Through my experience, I would say that over 90% of people should really have a financial advisor to help them achieve their future financial aspirations.
Investing On Your Own? Choosing a Brokerage
If you have decided that you are capable of investing on your own, then it’s time to choose an online brokerage. This can be quite an important decision, so let’s take a look at how various online brokerage firms rank against one another. According to Online Stock Trading Review, here’s the top 10 online brokerage firms.
- optionsXpress – No maintenance fees, $0 broker assisted orders, $8.95 market trades
- optionshouse – No maintenance fees, $3.95 broker assisted orders, $3.95 market trades
- TradeKing – No maintenance fees, $4.95 broker assisted orders, $4.95 market trades
- Scottrade – No maintenance fees, $27 broker assisted orders, $7 market trades
- Fidelity Investments – Various maintenance fees, $7.95 broker orders, $7.95 market trades
- E*Trade – Various maintenance fees, $45 broker assisted orders, $7.99 market trades
- Charles Schwab – No maintenance fees, $25 broker orders, $8.95 market trades
- TD Ameritrade – No maintenance fees, $45 broker orders, $9.99 market trades
- Sharebuilder – No maintenance fees, $6.95 market trades, $5.95 if you are a Costco member.
- First Trade – No maintenance fees, $26.95 broker orders, $6.95 market trades
My Brokerage Experience
For the most part, any of these brokerage accounts would be an excellent choice. Personally, I have used E*Trade in the past and have never had an issue with their services. In fact, I have let the account sit idle for a couple of years and encountered no fees for maintenance or inactivity. Before selecting your brokerage firm though, be certain that they have a large assortment of mutual funds and index funds available for your investment. Also, check how easy it is to transfer money from the brokerage account to your personal bank account. This can obviously be a very important key in your money management practices.
How did you start investing? Who are you brokering with?
This post was featured on the Midlife Finance, Canadian Budget Binder, Common Cents Wealth, Monster Piggy Bank, Fitnancials, Money Bulldog, The Swanky Carnival of Retirement, Cash Funny, thank you!
My Money Design says
I’m a fan of Fidelity as my online broker. They make everything easy to use and they’ve got just a ton of resources for researching a company before you buy their stock. Plus if I ever feel like getting into something else like a mutual fund, etc. I’ve got access to them right there within my brokerage account.
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Pauline says
the tools to research a company sound like a great perk to have when looking for a brokerage firm.
Glen @ Monster Piggy Bank says
I use my bank as my online broker. They have a great platform for me to trade and it is free for me to use. The only problem with them is that they only allow me to invest in Australia. When I want to invest overseas I have to use a higher fee broker which is a little annoying.
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Pauline says
Free trading is pretty good even though it is just national, saving $7-$8 per trade is huge.
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DC @ Young Adult Money says
I like your breakout of the fees with each brokerage. I just use Fidelity, which services my 401k and ESPP as well.
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Pauline says
Did you end up with them as a personal choice or because it was easier since your 401k was there?
Thomas | Your Daily Finance says
I stated investing early because my uncle made me. I learned a lot but wasn’t ready. As I got older and wiser I started reading up and following companies I used a lot. I use to use the approach you mentioned about having enough money saved up for a rainy day. However I am starting more and more to fall into the Pauline thinking. I wont put all my money to work but some of it is just not earning a dime so its almost losing money with inflation.
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Pauline says
You are losing money with a big EF, or missing out on not winning, or paying for your peace of mind, however you put it. As a single childless person who has over $20k in available instant credit I’d rather take the risk and if something happens, know my cushion is in the form of a card, that I can pay the next month after figuring out which investment to sell, maybe at a loss, but the potential for reward is great and better risk while you’re young imo.
John S @ Frugal Rules says
We’re with Scottrade and OptionsHouse for our brokerages. They have different features I like, plus it allows me to trade in one if the other is down. Having worked in the online brokerage space for a number of years, there is so much that should go into a decision of where to choose and how to invest that many do not think about and it’s to their detriment. A lot of it comes down to a lack of education, which is a shame as there is so much available out there.
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Pauline says
there is a ton of free info but it takes hours to put in the work and I understand why people are too lazy to do it. But for this I would recommend index fund, not taking risks if you don’t do your due diligence.
Rita P @ Digital Spikes says
I got into investment pretty late but i am happy i am now investing for my future. It is better later then never. One of my friend taught me the basics of stocks and investment. Good post Derek, yeah I agree one must have emergency funds or savings aside apart from the investment as it helps because it is safe money
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Pauline says
Yes, better late than never. And you still seem pretty young to me Rita!
Liz says
We have a small investment account that has done very well over the last. I wish we had invested more. However it’s challenging to build an investment account when you are simultaneously paying off debt and building an emergency savings account. We are conflicted about how much risk we can afford
Pauline says
I always recommend not to invest any money you can’t afford to lose. It is nice to get a bigger return than on your debt, but paying off debt is a guaranteed, instant return. If you are unsure, prioritize debt.
Laurie @thefrugalfarmer says
We are just now learning about investing and will likely go the Scottrade route, and yes, we will keep our emergency fund intact. For a family of six, that’s a necessity in our eyes. Great post, Derek – thank you!
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Pauline says
Of course, my mindset as a childless single person is different. With another mouth to feed I’d probably have a bigger cushion.
Matt Becker says
All of my money is with Vanguard. I think the value in a financial planner is really in helping you make a plan and staying the course, no in choosing investments. There are plenty of good resources (bogleheads.org is a great one) that can show you easy ways to invest very effectively on your own. A broker is, in my opinion, a waste of money. But a good fee-only financial planner who can help you make a plan (not manage your money) could certainly be valuable.
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Pauline says
good tip, once you have a plan, it is easy to automate most of the investing decisions.
Brian says
Few Things:
1. I agree with Pauline and don’t really believe in a large emergency fund that has to be out of the market. No real point in letting my money lose value to inflation every year while the bank makes a profit on me
2. Sharebuilder is now only $6.95 a trade so you will want to update your information (been this way for a couple of months now). It is even cheaper if you sign up for an account and are a Costco member ($5.95 a trade) so just a little more information.
3. I love me some Vanguard, I just hate that they have such a “high” barrier for entry that might scare off many investors who are just starting out, but you can kind of counteract that by using Schwab who is also very solid.
Pauline says
Thank you Brian, I have updated the info and added the Costo discount. I just saw in another comment Jamie was saying that the minimum for Vanguard was $3,000, if you can have it in cash with them and invest as you go, it doesn’t sound that steep to me.
Matt Becker says
You can actually start with $1,000 if you use one of their target date retirement funds.
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Mrs PoP @ Planting Our Pennies says
We have a small taxable eTrade account, but plan on doing mostly index fund instinct so will also add a Vanguard account for those trades.
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Pauline says
I have an index with no fees when you buy/sell, just a low fee every year, less than 1%, it does the job and you can add to it automatically every month.
Jamie V says
I’ll be going with Vanguard. I’d like to build up an emergency fund, but it realllly grates on me that it’ll sit in a bank account earning pretty much nothing (for all that cash!). I thought about putting it in a money market account. It’ll earn a bit more in interest, and it seems liquid enough that I could get the money within a day or two..I hope! Also, I’ve seen recommended and have been entertaining trying out Betterment for starting out in investing, as I don’t have the high minimum requirements for Vanguard ($3,000 min. is hefty at this point for me).
Pauline says
I am not a big fan of the emergency fund either as I stated in this post, but you would have to make sure that if you need to access cash quickly, for a car repair, a roof leak, etc.. you wouldn’t touch your investments. Chances are if you are just getting started that for the first few months your investments will be negative if you factor the fees, so you would lose money by withdrawing. You have to invest only money you can set aside for the mid to long term.
Jake @ Common Cents Wealth says
I’m finally at the point (after paying off all of my debt) where I can begin investing. I graduated with a degree in finance, so I think I’m going to try to do it myself at first. My goal will be to find a brokerage with the lowest regular fees possible. Being that I won’t be trading too much (in it for the long-term), the fees for trading won’t be as big of a deal for me.
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Pauline says
When I started with forex I had a free demo account, it was great to learn how the buttons work and see with fake money if it is worth a try or not.
Pauline says
They are reasonable if you make a medium size trade, for just one share it is a bit step to pay $8, but if you aren’t too sure better pay $8 than end up buying 200 shares “to save money”!
Kim@Eyesonthedollar says
I do most everything with Vanguard. You can buy individual stocks for a trading fee just like a brokerage account. If you want to invest in an IRA, you have to have $1000 and you can pick from a few target retirement date accounts of the STAR fund. I have started all of my IRA’s with that fund and switched when the balance was about $3K. I think the important thing is to get started.
I see both sides of the coin with the emergency fund vs investing more. I think it comes down to what you are comfortable and how fast you can become liquid if need be.
Kim@Eyesonthedollar recently posted…Pensions and Investments – When Some People Aren’t Ready to Give Up
Canadian Budget Binder says
Thanks for the info Derek. I don’t invest on my own yet as I’m not confident enough so we use an advisor. As for the emergency savings we keep enough in liquid so it’s readily available as needed but there are other ways you can invest the money so you can pull it fast enough in the event of a catastrophe.
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Daisy @ Prairie Eco Thrifter says
Most of my investments are currently in my retirement portfolio, invested in mutual funds. I’d planned to start up with Td eseries when I paid off my car loan which I did last week.
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Chris @ Stumble Forward says
All of my investments are all in retirement accounts such as my Roth IRA and Simple IRA. However I’m planning to move my Roth IRA because I’m not happy with the company it’s invested with right now.
Dividend investing Martin says
I first started trading stocks. It didn’t work. Now I do not trade but invest. Every month I transfer some cash to one of my accounts and as long as I save at least 900 – 1000 I buy shares of dividend stocks and collect dividends and reinvest them. I have accounts with TD Ameritrade, Scottrade and Fidelity. Recently I came across a a broker who would allow you to create a portfolio ( just a list of stocks) and then buying that portfolio. So I opened an account with them and created a list of dividend paying stocks and now I am transferring cash to the account. After I save at least 1000 dollars I will be able to buy the entire portfolio (you can invest as low as $250, but commissions (to buy a portfolio is $9.95 a purchase, buying individual stocks is $4.95) will eat you up) and they purchase whole numbers and fractions of your portfolio based on your desired allocation. I like the idea a lot. IMO it is a great concept. The name of the broker is Motif Investing and if you open an account with them now, they will give you up to $150 bonus.
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