For novice investors there are a wide array of options to choose from, but its hard to figure out which one meets your needs.
For younger investors who are just starting out, the traditional advice has always been to invest in Stock Index Funds. This means that you are investing in a broad set of stocks that make up a major index such as the S&P 500 which is composed of 500 stocks which broadly represent the US economy. Over the long-run, albeit with significant volatility, such an index fund returns about 10% a year. In the past few years since the market crash of 2009, stocks have done much better than that averaging over 20% a year gains.
However, let’s say that you have done your research and believe that biotechnology stocks are going to do very well over the next year. Then you may want to invest in a biotech related Exchange Traded Fund (ETF) instead. Most ETF’s are passively managed by an administrator and are made up over many underlying stocks related to a particular sector. So if you purchase a healthcare ETF, it would be composed of healthcare stocks and would appreciate and depreciate based on how those stocks performed. The upside of ETF’s is that they are passive, and allow you to take sector specific risk without having to research all of the individual stocks.
Mutual Funds are similar to ETF’s but have higher fees since they are usually actively managed by an administrator who selects stocks and their weightings within the fund based on their own view. There are several ratings agency such as Morningstar that rate how well the fund has performed over the past few years. Here one can take specific sector risk such as investing in a particular country that a fund manager administrates and small individual investors would have a hard time getting access to otherwise.
That’s a lot of information and it can take a while to get comfortable risking hard-earned savings, and so it’s usually a good idea to practice for a few months on a virtual stock exchange. This way you can get a feel for investing, and see if your strategy has merit — this is especially true when investing in single name stocks.
One such platform — Investfly.com, allows you to practice with an unlimited number of portfolio’s and let’s you screen for stocks that fit your criteria. For more advanced users, there is even a section on stock automated so that the site can take care of your trades and ideas when you are not watching the market.
They’re worth a visit, especially since they’re currently running a stock market game. The user with the highest percentage gain, walks away with 1K in cash. Not a bad way to practice investing.