How to Select Your First Stock or Invest with $2,000


Dear Smallivy,

Ask SmallIvy
Ask Small Ivy
In your 4th February 2013 you wrote:
“​If you are willing to learn to invest in individual stocks, $2000 is enough to buy shares in one company in the $10-$18 range.  Look for a stock that you think has good long-term prospects – one that you think will expand and grow for years to come – and expect to own it for a long time.

A final way you could invest $2000 is to buy shares in an Exchange Traded Fund (ETF) through a brokerage firm.  These are like mutual funds with super low costs that trade like stocks.

My question concerns stocks within $10-$18 range.  How do you find out stocks which has good long-term prospects – one that will likely expand and grow for years to come ?

Also, how many ETF shares do you buy with the US$2000 investment and what type of ETFs are the best?  There are different types of ETFs.  Do you buy one, two three or more ETF types with than investment amount of US $2,000?

Thank for your anticipated response.

Davidson

Davidson-

Thanks for the questions.  First on the question of finding a long-term growth stock, that is the subject of my next book, if I ever finish writing it.  In general you want to find a stock that has:

1.  A history of growing earnings in the 10-20% range (more is not sustainable).

2.  A lot of room to grow – they should have more markets to enter or they should be adding products.

3.  No dividend or a small dividend.  They should have plenty of places to put their earnings to grow the business, so they should not be returning money to shareholders just yet.  Also be wary of stock buybacks.

4.  A history of share price increases.  You want a company where you can almost lay a ruler over their share price for the last 5-10 years and see a steady climb.

Finding data is tricky, and finding a way to screen stocks is even harder.  I use a service called ValueLine Investment Survey, which is both online and in print, but it is pricey if you’re just getting started.  You used to be able to find copies in some libraries, which is a great way to go if you’re only going to be investing a few thousand dollars a year or so.  I’m not sure if this is still the case since today libraries are just where people go to watch you-tube videos.

Otherwise, just look around for companies that are relatively new and seem to have a good business, then check out their price charts and earnings on Yahoo or another online source.  I generally find restaurants and retail stores are great places to look since they can grow their businesses by just adding locations.  Be wary of stocks with a high PE ratio (greater than maybe 30) since these may be bubble stocks that will eventually come crashing back to earth.

The ETF question is much simpler.  With $2000, just buy one and buy all that you can with that $2,000.  Good choices to start are just simple, broad-based ETFs like those that track the S&P500 or the Dow Jones Industrial Average.  An ETF that tracks the small caps is also good.  Make sure the fees are low (less than 0.25% per year, maybe much lower).  People may think I get paid by Vanguard for endorsements (I don’t, except for the returns on their mutual funds and ETFs I receive in my own accounts), but Vanguard has a lot of great low-cost ETFs such as their S&P500 ETF and their Total Stock Market ETF.

In either case, you want to just make this your first step in investing.  Buy your first stock now, then save up and buy another, then a third and so on.  Build up positions in four or five stocks that are the best choices in four or five industries.  Start to diversify into ETFs or mutual funds when your portfolio starts to build beyond the point where you’re comfortable being concentrated.  (Also, you should be investing in mutual funds through your work 401k plan or a personal IRA as well since you can’t take the chances with your retirement savings that you can with your regular investing account.)

If you choose the ETF route, buy into your first ETF, then buy into a second then a third, getting positions in large caps, small caps, and International stocks, then add to those three ETFs regularly.  You could also buy into the Powershares High Quality Index (SPHQ), which is made up of solid stocks that won’t do as well in great markets but will not lose as much in bad markets.

Thanks for the question,

SI

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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