Between your massive telephone bills and saving up for a trip home to India, you may perhaps find yourself with a little leftover money - a small foundation toward your life savings. You have probably put it in a neighborhood bank where it is earning a miniscular 3.5 % interest rate. And then you turn on the TV and see the Stock market hotting up or the gold prices go up. You find yourself wondering "Yeh Wall Street ko kya ho gaya hai ? and how do I invest my money in stocks ? I too want to become a true blue capitalist." Don't despair ! Here is a gentle introduction to the American Stock Market for the uninitiated. (Experts, especially Satya Prabhakar :-), please skip this post)
Q: Can Indians on student visa invest in stock market here ?
A: As nearly as I can tell, the answer is yes. Only, you have to pay the taxes on any profits you may make (only after you sell your shares and realize the gains. There are no taxes on the 'paper profits'). Some investment companies might withhold 20 % of your profits automatically as taxes. Keep meticulous records of all financial transactions.
Q: Isn't investment in Stock Market risky ?
A: Absolutely ! Money in a federally insured bank is mostly risk-free. That's why you get measly returns in banks. On the other hand, if you invested your money in high stake lottery tickets, you have taken a mega risk. The Stock Market is somewhere in between - there are risky stocks and there are very, very risky stocks - there is no extra gain without associated extra risk - you have to decide on how much risk you can tolerate and invest suitably.
Money in the stock market is not like money in the bank. You have to watch your investments and how they perform and if the fundamentals are changing. But you don't have to spend your afternoons monitoring M1 money supply or yields on T Bills. Just some minimum attention to details.
On the average, over the last several decades, the stock market has been returning more than 10 % a year. Note however that in any given month or year or day, the Dow Jones and the other averages may go down. So it is better to stay in the market for the long haul, unless you are smart enough to time the major market moves. This kind of return of 10 % a year beats inflation handily. In fact, if you have a lot of money and NOT invested in stocks, you are just missing a nice chance to build some wealth.
Also, if you are going to be in the market for the long term, it doesn't matter a whole lot WHEN you enter the stock market and when you get out, since day to day fluctuations are going to be averaged out.
Q: How do I invest in the stock market ?
A: There are essentially two ways of doing it. One is buying individual stocks and the other possiblity is to buy into Mutual funds. Unless you have a lot of money, stick to Mutual Funds.
Q: What are Mutual Funds ?
A: Mutual funds are where the money from all the participating investors is pooled in and with the resulting cash, investments like stocks, bonds etc are purchased by professional money managers. There are many, many Mutual Fund companies. Each Mutual Fund company in turn can have several 'Funds' with various philosophies. For example, Fidelity Investments is a Mutual Funds company (actually they have other services also besides Funds) and has a variety of Mutual Funds - they have funds which only invest in Europe or in Pharmaceutical stocks or in Aggressive Growth companies. All Mutual Funds companies will also have a Cash or Money Market Mutual Fund (with bank-like yields) where you can decide to park your money in case you want to be out of the market temporarily.
Q: How do I know which Mutual Funds are good and which are bad ?
A: Usually magazines like the Consumer Reports or Forbes will rate them every year. Again, the past performance is no guarantee of continued future returns. Make a trip to the library.
Q: How much money can I invest ? I don't have a whole lot.
A: Some Mutual Funds will let you invest as little as a few hundred dollars. If you promise to invest a fixed amount every month, some of them don't even have any set minimum. However watch out for a sales commission some of these companies impose. The technical term for the commission is 'Load'. A lot of the Mutual Funds companies don't charge any loads ('No-Load' Mutual Funds). Research after research has shown that there is hardly any performance difference between Mutual Funds with loads and without loads. So stick to 'No load' Mutual Funds.
The best thing to do is to call some of these companies and ask for their brochure. The following are some Mutual fund companies and their phone numbers: Fidelity Investments (Only some funds are 'no-load' phone: 800 544 8888), T Rowe Price (phone: 800 638 5660), Janus (phone: 800 525 8983) and Twentieth Century (phone: 800 345 2021). The last three companies, I believe, are 'No load' companies. THIS IS ONLY FOR YOUR INFORMATION. I AM NOT ENDORSING ANY OF THESE COMPANIES.
Once you get their brochures, see how their funds have performed over at least the past five years, especially in 'down' years like 1989 and 1987.
Q: What if I suddenly need the money for some emergencies ?
A: Your money is more or less liquid. It may still take nearly a month to get it back from the investment company, but often sooner.
Q: How do I know how well my investments are doing ?
A: The Mutual Funds performance is tabulated in newspapers every working day. Also, most of these companies have toll-free numbers to check on the Funds. Be patient. Don't expect your money to double or triple in months. Take off those dollar signs dangling in front of your eyes. Think of your investment as an informed participation in the economic growth and not some kind of a gambling.
Q: How do I buy individual stocks ? How much should I invest at a minimum ?
A: In principle, you can buy even one share of a stock. For example, if IBM is selling at $ 55 a share, you can buy one share. But you have to pay a commission to buy and sell stocks and there is a minimum commission of about twenty to fify dollars to buy even one share. So your IBM share will have to go up by forty to a hundred dollars for you to even break even. In reality, shares are bought in hundreds and occassionally in 'odd lots' in numbers like fifty, thirty five, seventy and such.
In order to trade in stocks, you have to open a brokerage account in one of the many brokerage companies. There are 'Full service' brokers who even give you financial advise and there are 'Discount brokers' who only do the transaction - it is better to use just the discount brokers since you can do the stock market analysis yourself and that is half the fun. There may be a minimum imposed by these brokerage companies to open an account.
Q: How do I find out which stocks are good and which are bad ?
A: Aha, a million dollar question. If you go to your library (reference section) there is a publication called 'Value Line'. This lists a profile on nearly two thousand companies and their financial performance and what these companies do etc. Also, you may want to read the business sections of newspapers. Picking the right stock is either a fine art or plain dumb luck. Monkeys throwing darts and picking stocks at random probably perform not much worse than professional stock pickers. However, if you do want to develop a philosophy about picking stocks, do some reading.
One of the good books on stocks and Wall Street in general that I would recommend is 'One up on Wall Street' by Peter Lynch, which should cost you about ten bucks at a local bookstore. The author was the manager of one of the highly successful Mutual Fund (Fidelity Magellan Fund) which returned nearly seventeen times the original investment in fourteen years. He has outlined some of his stock-picking techniques. This is a non-technical, entertaining book.
(And how am I qualified to make this post ? Because in the past, I have
helped several desi students in getting started on their investments. This is
just a synopsis of their usual questions. Also, I have a portfolio of
several Mutual Funds and stocks.)