Expert: Gina Boykin - 9/21/2007

Question
Hi Ms. Boykin,
    My question is I would like to start investing money and I though E Trade would be a good place to start.  I don't know if you can guide me into the right direction?  I have very little knowledge but I'm hoping you can help get my foot in the door.

Thank You

Answer
Before you start investing, you may want to get some general investing education.  Some great websites to visit are www.youngmoney.com, www.investopedia.com, and www.fool.com.

On the E-Trade website, I am not sure if you are interested in stocks or mutual funds.  Since you're new at this, I would suggest sticking to mutual funds.  On the E-Trade website you can search all of the mutual funds they offer by "All Fund Families" or "No Load-No Fee Funds".  Pick the no load and no fee ones.

Then you can review the performance, fees, etc.  Here are some hints on what to look for:

Morning Star Rating - the more starts the better

Category - this is the type of fund.  There are bond funds, government funds, and various types of stock funds, and even funds that have both bonds and stocks.  When you see "small", "medium" or "mid", and "large" this is referring to the size of the companies.

Expense Ratio - the lower the better.  These are the fees that are paid from the mutual fund portfolio to the portfolio manager, and reduce the return that you'll get.

Performance - the higher % the better.  Look at the 5-yr, 10-yr, and the "since inception" rates. The 3-yr and 1-yr don't mean much at all since you should be investing long term.  Remember that the % will be based on the type of fund as well.  For example, a higher risk foreign fund will always be higher than a bond fund.  If you're going to narrow down the list and compare funds, select a type first to compare apples with apples.

Initial Minimum - You may want to sort these out from the beginning, since there is no point in looking at a fund that you don't have enough to meet the minimum deposit required.

Risk - Looking at the morningstar risk rating may help you to determine if a fund is too risky for you (or not risky enough)

You will see that the funds with the lowest expense ratio are the index funds.  These are funds that follow an index (ie. there is an S&P 500 index and a Small Cap Index).  The portfolio manager, instead of spending a bunch of time trying to pick the best stocks, just selects stocks that are in the index.  This is why the fees are lower.  These are a great starting place for beginners.  An index fund will not have a price like a stock.  Instead it will have a NAV (net asset value).  The value is determined at the end of each trading day based on the prices of all the underlying stocks.  This is important because when you buy an index fund, you will see that the trade will not go through until 4pm.  (If you purchase a stock at 11am, it will go through immediately.)

You may here or read about ETF's (Exchange Traded Funds).  These are very similar to index funds because they follow an index.  They even have a little bit lower expenses than index funds.  There is one major difference- they don't have a NAV but are traded just like a stock.  

This means that your trades will be placed immediately.  It also means that there are commissions that you will pay each time you buy/sell an ETF.  If you are planning to invest on a monthly basis, stick with index or other mutual fund.  If you are planning to invest a big lump sum, an ETF may be good for you because the one time fee will be offset by lower management fees over the years.

I hope this helps!  Happy investing!!