Oran Hall | University student wants to invest in stocks
QUESTION: My daughter is studying at UTech and asked me for $20,000 to buy shares in a company. Can you give me some advice on this matter? I would appreciate a list of companies and the minimum she can start with. When is the best time to buy?
FINANCIAL ADVISER: If you can afford to, let her have it, but both of you should understand that good returns will not necessarily come overnight. I suggest that you have a discussion with her so that you can understand her motivation.
It is good to start investing at a young age and to do so consistently. You would be surprised to see how well such a course can turn out. The approach should not be to make a quick return, especially by trading, that is, buying and selling regularly. This often erodes the gains due to the costs, such as the commission, and may lead to missed opportunities to make better returns due to selling prematurely.
If she is doing a business course, this could be a good opportunity to gain first-hand experience in investing, including analysing the performance of listed companies. Ultimately, the final decision regarding what to buy would be hers, although it would be useful to get advice from a competent adviser.
I do not give advice relating to the stocks people should buy in this column. Neither do I do so directly to individuals. That is best left to licensed securities dealers who are employed by the stockbroking companies and the portfolio management companies.
It is interesting that you have asked for a list of companies. The approach of looking at several companies is a good one. Your daughter should take a close look at what is happening in the economy and decide which sectors look most promising and then identify companies in one or more sectors that are good performers.
It would make sense to focus on an area in which she has some interest or with which she is familiar. This would help to heighten her interest and make her more willing to do the necessary research.
Even if she is not a business student, she should learn to do some financial analysis if she wants to make decisions that are informed rather than going by feelings or by what other people suggest. Knowing a little about companies she wants to invest in can be useful in any discussion she may have with an investment professional.
The minimum sum the stock broking companies accept varies, but because several set a minimum commission, it would be prudent to place an order on which the commission would be equal to the minimum commission charged by the company. If, for example, the minimum commission is $500, the minimum order that would make sense would be $25,000. Considering that some companies have a smaller minimum charge, $20,000 could work in such cases.
Is there a best time to buy stocks, generally, or to buy specific stocks? The ideal is to buy low and sell high, but I have not yet met anyone who has been able to determine the exact low point or high point of the price of a stock even with the most sophisticated tools available.
When a long-term approach is taken, timing becomes less important. Sure, there are times when the price of a stock seems high, but that soon becomes unimportant when the performance of the company improves and the price improves. Delaying a purchase to buy at a better price does work sometimes; other times, it does not.
I would say, though, that buying when there is a general stampede to buy stocks might not be the best time to enter the market as prices so often reach levels that could be seen as being too high for that phase of the market. Often, good opportunities present themselves when the market is going through a period of correction, that is, when prices are falling after a run-up in prices, but even this approach is not without risk.
A good approach for someone planning to be in the market for a long time is to invest the same amount in the same stocks periodically. This makes it possible to buy stocks at different prices - high and low - and to get more of the lower-priced stocks. It does not seem that your daughter would be ready for this approach now.
It is best to buy stocks that stand out in their industry or sector and that are resilient in market downturns. With good guidance from a competent professional, she should be able to make such a choice, but there is no guarantee the decisions made will be profitable particularly in the short term.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email firstname.lastname@example.org