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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?

Investing, Starting Out
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October 2016

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

October 2016
October 2016
October 2016
September 2016