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How To Start Investing: 13 Strategies I Used To Save Money, Invest And Reinvest

By Edited Sep 22, 2015 0 0

Bad Beginnings: A Little History

The first stocks I owned were 20 shares of Home Depot.  My father gave them to me and told me to never sell them.

They crept up a little bit in value every year, and I was tempted to add on to them.  Dad recommended a stock broker to me so I visited the office and was told commissions were $50.  As I had "just" $150 I wanted to invest, he all but told me to come back another day.  A few paychecks later and I was able to reduce the impact of his commission to around 10%.

I made a few trades, and a little money, but the cost of doing business was like walking, slowly and insistently, through barbed wire.  I did finally make some ridiculously easy money that I reinvested into several other stocks, but I still wound up paying $500 for the various reallocations of money.

The big meltdown of Internet stocks in 2000, the speculative nature of my main stock, my other stocks bought on margin (credit) added up to one big disaster.  My margin stocks had to be sold off, and my $8000 in InvestAmerica (what a name, I think, looking back) dwindled all the way down to a figure I will also never forget, $161.11.  Taking the broker's ruthless $50 off that, I had $111.11 left, which promptly paid off part of a cable bill.

And so ended my first investment run.  It really left me smarting and at an overall loss.  I didn't reenter the market until 2008.

Getting Better

I took to the Internet, and my broker didn't shed many tears.  I was now paying around $15 a trade, which made a huge difference in profit margins.  After a few months, competition and innovation drove down the commission price per trade to $7, and I was able to turn a few small profits here and there.  I just bought into big companies like my dad recommended, avoiding any and all stocks under $5.  My returns were nothing special.  Life cut into my trading when my housemate sold the house, and I left the market once again to cover rent elsewhere.

The Hang Of It

My breakthrough year was 2013.  I completed 62 trades at around $2.90 per trade, making small gains with each sale.  I got free shares of stocks, holdings value per share skyrocketed for one company, and I didn't let my portfolio free-fall.  The following is the combination of strategies, practices and products I used to boost my money in small but constant ways.

13 Strategies I Used For Making Money Trading

1.  "A penny saved is a penny earned" doesn't just apply to banking; it applies to trading as well. Obtaining unlimited trades can really drive fees down.  By skipping a few coffees a month, I set aside $15 a month for BuyAndHold.com.  In doing so I saved a dollar or so each trade even when compared to a $4 per transaction service.

I didn't flip stocks on a moment's notice just because I could.  However, when I had to invest only $40-$50 at a time, being able to sell for a 3% to 8% profit with no extra fees and then reinvest was a godsend.  In this manner I was able to slowly turn $40 into $43, $43 into $48, $48 into $56, and so on, as I bought more and more shares.  A few times, with no extra fee, I was also able to back out of stocks that started to slow their growth and then weaken.

2. Dividend reinvestment acts very much like compound interest.  With this option in a trading account, an investor doesn't receive cash, but fractional shares, when a stock pays a dividend.  This means that in the next dividend payment period, those fractional shares will also pay out.  This is how I got a whole share of Newcastle free, just by holding.  Which leads to the next tip...

3. Splits and spinoffs can often make a portfolio grow.  When I held and held my shares of Newcastle, I was happy getting quarterly fractions of the stock.  But when I read that the company was going to spin off into two separate companies, each paying dividends, I was thrilled.  I made an effort to save up for another 4 shares before the split happened, and in time, $90 in 9 shares turned into 18 shares over $130.

4. Oversold stocks are another big source of income.  Newcastle was an oversold (and splitting dividend-paying) stock that was around $7 when I got it.  It went to $10 within months.  Some websites like Finviz mathematically define stocks as oversold when they reach certain criteria.

5. Keeping an eye on portfolio stock prices, company news, online broker and community recommendations, financial reports, and industry trends helps a trader to time buying and selling.

6. As I bought in anticipation of gains, so I sold in anticipation of losses.  I maintained a goal of slow but steady increases in my stocks, usually around 3%.  Whenever an investment drifted more than a few percentage points below my purchase price, I used unlimited trading to cheaply put the brakes on a free fall and reinvest.  I haven't made more than three losing trades in a year out of 60+; patiently waiting out small dips has nearly always paid off.

7. I didn't buy stock in unhealthy companies.  I also didn't gamble on a development or two to turn around an incompetently run company.

8. Fractional shares of quality stocks are ideal for building a position.  I had a whopping 2 shares of 3D Systems and not much money to put into more shares, so I bought .4 shares, and then 1.6 to reach four shares.  A 3 for 2 split happened, giving me two more shares.  I spent around $160 on everything a little at a time, but those six shares are now around $80, for a total of $480, or three times my original investment.

9. Researching a company's financial health, risk, momentum and valuation determined how often I needed to watch it, and how long I needed to hold it (I make it a habit to check stocks at least once a day). Company and stock profiles are everywhere on the web, often for free.

10. When the whole market went down at once, my stocks weren't to blame, and they did go back up, especially after simple sentiment caused a temporary dip.  Sometimes when the market took an irrational dive I'd buy a few more shares of the most shaken stocks.

11. Overall profit will equal a stock's gain times the number of shares bought, minus any transaction fees.  I kept my total desired gain in mind when I bought.  I disregarded the monthly fee for some time -- it did eat up profits in the beginning -- but it did pay for itself by year's end.   By that time, if I had paid $6.95 per trade, I would have had $130 less, more when you count lost growth potential.

My goal per trade wasn't much when I started out, just an increase of $3 to $5 on a $40 position.  A single share of perfect stock that I could barely afford didn't have any room in my portfolio, which was filled with multiple shares from cheaper, reasonably performing companies.  Sometimes I would sell half my stocks to reinvest in a "safer" or more lucrative company.  It seems that simply holding has been as good for me as diversification; shares of CNI (Canadian National Railway) I traded for have deflated slightly, while the more seemingly risky DDD I sold to buy them has cheerfully continued climbing.

12. Developing personal thresholds for stopping losses, holding, and reinvesting is essential.  Eventually I learned how to sell underperformers, hang on to a portfolio through good times and (some) bad, and trade for more shares and larger gains.

So... How To Get Started?

Ideally, I would skip a few personal vices and put down $15 a month on a BuyandHold.com or a similar investing site, and then research and buy five shares of quality dividend, split, or oversold stocks.  Stocks in the news may do a little bit better, but it's best to build on health, not hype.  My first investment after 2008 was $38 for 5 oversold shares, with share cost a little over $7 apiece.

I wouldn't get both unlimited trades and per-transaction trading accounts.  If you really can't swing $15 a month in regular fees, I recommend buying a quality oversold stock through ShareBuilder or a similar company and holding until it reaches a normal price in few months.  My next best recommendations would be to buy dividend, split, and newsworthy stocks, in that order.

Aside from cost, I've never had any issues with only using fee-per-trade companies.  If you just want to make one or two trades a month, which I think can be really harmful if you let your portfolio slide unattended for days, this may be a somewhat more affordable choice.  However, you will need to make up your mind once you purchase a stock this way.  Selling, reinvesting, and re-selling, plus any losses, make rapid trading very unpleasant: that'll be four commissions you have to pay to get in and out of a mistake, and eventually cash out.  Assuming it's all done within a month, at $7 a trade ($28), that's $13 more expensive than just paying $15 monthly.  Even if all you do is swap one stock for another, that's $14, and flexibility in a growing portfolio may require a few extra trades.

Hopefully this article can help you on the way to investing if you never have before.  Please let me know if this guide has helped and if you have any questions or comments!

Recommended Reading

The Neatest Little Guide to Stock Market Investing: Fifth Edition
Amazon Price: $16.00 $6.09 Buy Now
(price as of Sep 22, 2015)
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