It is important for younger people to learn how to manage their own stock portfolio. By investing early, mistakes will cost less and the lessons learned will be very helpful for the future. Investing is a lifelong endeavor. Goals should be set to determine how to allocate capital appropriately. If a person finds out that they are not interested in investing or that they just plain suck at it, then they should get someone else to do it for them. They should know enough to pick someone who they are comfortable with and who is fully qualified. Or they can choose mutual funds themselves to create a diversified portfolio. I like investing, so I would never get someone to manage my money.
With such low commissions these days, almost anyone with a few thousand dollars can create their own diversified portfolio with minimal transaction costs. In the past, commission for a single trade were $100 + or a fixed amount of the trades. Investors needed to have a six figure portfolio in order to minimize the transaction costs. It made no sense in the past to invest $2,000 when the commission costs were $150. Things have changed and a lot of online brokerages have slashed their prices charging less than $10 dollars per trade.
The general rule of thumb is to limit transaction costs to 1% or less than the amount invested. An investor who wants to buy $1,000 worth of Microsoft (MSFT) should limit the commission cost to 10$ or less. I think that is still too high an amount for people with less money. Investors should limit their commission cost to .5% or less, so that transaction costs would be 1% on a round trip trade. Finding the right brokerage account is not that difficult and I will show you which ones are good.
Brokerages such as MB Trading make it possible for small time investors to create their own portfolio. MB Trading only charges 1 cent per share with a minimum of $1 per trade. I am currently using MB Trading and I could not be any happier. Their money market account even pays 4%, which is really high compared other brokerages. Cash that is brokerage account gets swept into the money market account. Most other brokerages such as Scottrade and Tradeking only pay around 1%. The only problem with this brokerage is that users must use their software to trade. This means that they cannot use the browser to trade.
Another newer discount brokerage is SogoInvest. They charge $3 for market and limit orders. I have never used them before, but the price is very reasonable. I may open the account if they have some type of bonus offer.
You can start an individual stock portfolio with about $5,000. I suggest opening a MB Trading account and slowly buy 10 stocks. If investors want some fixed income in their portfolio, they should buy some decent closed end fund (CEFs) to fill in the fixed portion of their portfolio.
Someone with $5,000 who wants to have 80% in equities and 20% in fixed income can buy 8 stocks ($500 per position) and 2 CEFs ($500). They should build their portfolio slowly by limiting their purchases to a few stocks at a time. There is no need to rush. Do some due diligence and research before buying. Once the investors have more money available to invest, they can slowly add to the portfolio each month.
$10,000 would be a better amount to start with. With this amount, an investor would have 16 stock positions and 2-4 CEFs for a 80/20 portfolio. If the person does not have this much, they can start off with a few positions and build their portfolio over time or they can even lower the amount they invest in each position to even $250.
If $5,000 is too much, you can buy a diversified mutual fund until enough money is saved up.
With a portfolio larger than $50,000, I would limit each of my positions to about 2-5%.
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