Stock Investment Tips Blog

Despite impressive advanced on Monday, stocks ended up having their worst week in over five years this past week, with the S&P down by about 5%. This next week should be interesting for the stock market. Several banks are reporting their earnings, and we should hear some more information from Ambak and MBIA. I’m particularly worried about the latter two companies. Jim Cramer predicts that if one of those two goes belly-up, we could see the Dow drop by about 2000 points!

While most beginner investors may not realize it, commissions and trading fees can eat away their returns. Depending on whethery ou invest in stocks, mutual funds, or ETFs, various types of fees may hinder your returns.

Mutual funds almost always charge a percentage of a client’s assets in the fund. This percentage generally has nothing to do with how much a client has. Someone with $10,000 invested pays the same percentage as someone with $1 million. Therefore, for mutual funds, it’s just a matter of finding one that charges low fees. Make sure you don’t pay a load when you buy a mutual fund, and investigate its total management fees. It’s best to find funds that have a total fee of 1.1% or less.

Stocks are different though. For stocks, you pay a flat fee each time you trade. Generally, this amount is per trade, no matter how many shares are bought or sold. Most online brokers charge between $7-$15 per trade. For people with large asset bases ($1 million or more), trading often isn’t a big deal, as the fees represent a small percentage of their total assets. However, most people need to attempt to keep their trading costs down.

For example, if you have $20,000 in the market and pay $10 a trade, making just two trades a week would cost about $1000 a year.  This is 5% of your assets, which is quite a lot. Considering the market returns on average about 10% a year, you are blowing half your money in trading fees. For someone with this amount of money in the market, you should either trade less often (perhaps buy some ETFs) or consider mutual funds.

Perhaps the most important tip for everyone is to use the Internet to make trades. While all investment decisions are ultimately the responsible of the investor, trading on the Internet costs much less than making trades via the phone. For the same trade that you can make on the Internet for $9, you could easily end up paying $50 or more if you use the phone. If you think it’s appropriate for yourself to make Internet trades, consider using this method instead of calling your broker to make the trades.

After a grim 2008 start, stocks have begun to rally the past couple of days, showing respectable gains at the close. Many speculate that the reason people are buying are renewed hopes for rate cuts, as well as a general belief that the market is oversold.

For the year, the S&P 500 is still down just over 3%. Small caps and tech have begun 2008 horribly. Small caps are down by about 5.5%, with the Nasdaq down just over 6%.