Where can I start trading stocks and options with low expense ratios?
I am a college student with around $10,000 in savings. I earn around $1,000 per month. I want to start active trading as opposed to index and REIT's investing. Is active trading profitable at my saving level? If so, what is the best platform?
You actually sound like a young me! I had my first brokerage account at TD Ameritrade when I was in college trying to figure how to make money in the markets.....and here I am doing the same thing today!
Anyways, most studies suggest that the majority of people (professional or regular) do not systematically beat the market on any consistent period of time. Most people actually trail market returns when they try to outperform by active trading. This is due to the the fairly unpredictable nature of the markets as well as costs involved both in transaction fees and taxes on short term gains. You are likely going to be better off buying those index funds and holding them long term even, as boring as that may seem.
With that being said - there is a certain level of excitement in having some "play" money in the market. At the very least you will hopefully learn from your investing venture and maybe even make a little money. My advice would to be to invest the majority of the money you have allocated, for the long term, in index funds and let them sit there. Then carve out whatever you are comfortable potentially losing for your trading endeavor. As far as trading platforms - etrade, TD Ameritrade are all pretty good and fairly inexpensive. For options trading (which involves substantial risk and I really suggest you open a paper trading account first) you can look at optionshouse.
Tom Cymer CFP
President Opulen Financial Group LLC
First, I applaud you for having $10,000 in savings and working while going to college.
I am going to answer your questions directly first, because there are a few problems with what you are asking. Then, and I know you didn't ask, but I am going to give you my opinion on how to go about getting started with investing.
You said, "I want to start active trading as opposed to index and REIT's investing." Here's the problem with that statement. "Active trading" is a strategy, and index funds and REITs are types of investments. They are not opposites. For example, you could "actively trade" an index and a publicly traded REIT if you wanted. However, I don't recommend you do that.
Q. "Is active trading profitable at my saving level?"
A. Whether or not you are successful at trading is not determined by how much you have in savings. It does determine what type of trading you can do, but does not determine if you will be profitable. You may have meant, is active trading WISE at my savings level. I would have to say no on that question.
Q. "What is the best platform?"
A. I do not know of a "best platform". There are many ways to open a brokerage account. You could open one with a financial advisor, or get a simple online account on your own.
The following is just my opinion, not a specific recommendation.
You are off to a good start. You have a nice amount of savings, and you are working your way through college. I think you should continue with what you are doing. Keep putting money in savings for when you get out of school. Once you get your career started, raise your income, pay off debt (if you have any), then you can start thinking about investing.
Read this book by Benjamin Graham titled, The Intelligent Investor. Make sure to get the most recent edition.
Set a goal of investing 15% of your income into low cost index funds that fit your level of risk, and keep at it throughout your working life. You will likely have access to a 401(k), and I would use that platform to open an investment account.
Think long term, keep your investment costs low, invest on a regular basis, and work with a qualified advisor. In my experience, these are the things that will help you win at investing.
Thanks for the question, I hope this information helps you. Keep up the good work!
Wyatt A. Moerdyk, AIF®
Chief Compliance Officer
Accredited Investment Fiduciary®
Evidence Advisors Investment Management
Investment Advisory Services offered through Evidence Advisors, LLC, a registered investment advisor. Investopedia, LLC and Evidence Advisors, LLC are not affiliated.
Great question. Hold on to those savings for a while! Please go to Barron's online and see their review of online trading platforms. That is mandatory homework! Next, you will see that many of the top platforms will let you trade virtual accounts for free. Take full advantage of this to learn and excel at trading--without risking a dime of your $10,000. Read the extensive literature on trading and learn from the experience of others. Enjoy!
Congratulations on being a college student with $10,000 in savings! That is an amazing accomplishment! Before you compare index and REIT investing to "active trading," you want to maintain an emergency fund of cash that is sufficient to pay unexpected expenses. This cash shouldn't be invested at all, as you might need it in the middle of a market decline. Additionally, you say you earn $1,000 a month, and I'm assuming that you are paying your bills out of this money. If that's correct, your amount of monthly contribution into your investing account is probably limited. I would like to give you a few ideas to consider:
1. The other advisors are correct; research shows that index funds usually outperform active management. This is true mostly because picking outperforming stocks is very difficult, and that really doesn't depend on your saving level! You didn't tell me your major, but if it isn't finance, you probably don't have a lot of free time to spend studying the market right now. You might consider keeping your investments in index funds (that match your risk tolerance) until you are sure you have the time to devote to following the market.
2. If you really, really want to pick stocks, consider following a portfolio strategy called "core/satellite." In a core/satellite construction, most of your money is invested in index funds (that match your risk tolerance); that is the core. However, you can have small satellite positions where you choose stocks that you think will outperform the market. The percentage of each type of position varies, but obviously, "core" will be greater than 50%. If your research time is limited, but you still want to make trading decisions, you might consider sector funds for your satellite positions. Choosing winning sector funds will involve economic and market analysis that you may enjoy, but you will not have to do the detailed research necessary to select the best stock.
3. Trading options is a full time job. The leverage causes trades to move very quickly for you or against you. Additionally, if you are considering an option contract for a single stock, you have to do all of the stock research AND track the option position constantly. Further, if you are wanting to purchase "covered" positions, you have to own 100 shares of the underlying stock to purchase one option contract. I'm not sure your $10,000 portfolio is large enough to make this work. And I would never recommend putting all of your eggs in one basket like that. I would like to know why you are interested in options. Although they seem very glamorous, they are incredibly difficult to trade well. You have to know the direction of the equity move, how much it is going to move, and when it is going to happen. Options can be a great way to lose your $10,000 or more if you try to use additional leverage. You don't want to do that. Trust me. Please start with stocks. Even if you are wrong, it isn't likely that your company will go bankrupt within a year. When option contracts expire "out of the money," you get nothing.
4. I don't want to recommend a platform by name, but you need to choose a platform that has low costs associated with it. With a $10,000 portfolio, you will probably have an annual charge on any platform, so see how much that costs along with the costs of the trades. Best of luck, and remember that sometimes, boring is good!
Be prosperous! Peggy
Active trading is never a good idea if your goal is to earn a profit. Read Berkley professor Terry Odean's paper "Trading is hazardous to your wealth." To earn a profit above and beyond index, you must have information advantage, meaning that you must know something all other investors don't know. As a college student, you don't have information advantage. The best way to invest for you is to dollar cost average into a index fund or index ETF.