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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
How to start investing
Dear Dr. Don,
I am a first-time stock investor and I am thinking
about purchasing Jet Blue shares. How many shares should I buy for
the first time? I am conservative and don't have money to waste.
Derek Dirigible
Dear Derek,
Taking a flier on JetBlue Airways Corporation isn't necessarily
a waste of money, but the investment doesn't quite fit with your
portrayal of yourself as a conservative investor. The airline sector
has taken wings over the past three quarters, providing investors
with stratospheric returns, including JetBlue's year-to-date return
of 118 percent -- and that's after the stock experienced some turbulence
over the past few weeks when analysts downgraded the stock. You
may be late to the party on this stock investment.
Stocks trade in round lots of 100 or in odd lots of
less than 100 shares. A round lot of JetBlue would require an investment
of about $5,919, given the stock price of $59.19 per share as of
November 10th.
Transaction costs are part of the expense when buying
shares. Paying your broker a $20 commission on that 100-share purchase
represents a transaction cost of less than one-half of 1 percent.
Paying the same $20 commission on a 10-share purchase raises the
transaction cost to more than 3 percent. That's just to buy the
stock. You'll pay another commission when you sell the stock. When
you have to earn more than 6 percent on your investment just to
cover the commissions, it makes it that much harder to earn a return
net of commissions.
I think there is a place in most investor's portfolios
to take speculative risks. It should come after you've funded an
emergency fund and started an investment plan to help you meet your
financial goals such as retirement or college savings. Taking speculative
risks when you're just starting an investment program is tempting,
but like an athlete that skipped his warm up, you're more likely
to get hurt.
My rule of thumb for investors who are just starting
out is to diversify their portfolios. Try investing in an exchange
traded fund (ETF) based on a stock market index like the Standard
and Poor's 500 or the NASDAQ 100. Indexfunds.com
provides a primer on index investing through ETFs or indexed mutual
funds. Good luck.
-- Posted: Nov. 11, 2003
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