Dividend Investing With Less Than $1,000 Part 4: When To Start Stock Picking

Hey there, I’m quite happy to be back after 2 weeks of vacation! During that time, I gathered a lot of dividend info and topics to write about. But first, let’s continue this dividend beginner investing series with part 4: When to start trading dividend stocks?

Some say right after you open your brokerage account, but I think different. If you have just started to invest and have little basic knowledge about trading, I really think that buying the first dividend stocks that seem “logical” to you could be a mistake. In fact, if pros can’t beat the market regularly, why do you think you can be better than the bulls of Wall Street?

On the other hand, building your dividend portfolio has several advantages:

#1 You can customize your portfolio according to your needs.

#2 You take the dividend cash or reinvest it.

#3 You won’t be bothered by ETF and mutual fund MERs.

#4 Finally, there is a great feeling attached to the trading of stocks .

Then again, the fatal question is; When are you ready to trade on your own? This is where I draw a few interesting guidelines;

#1 Investment knowledge

Opening a brokerage account doesn’t make you an investor. There is fundamental investment knowledge you should possess before touching any stocks. Among the basic knowledge I recommend;

-         Being able to read financial statements

-         Being familiar with financial language (P/E ratio, payout ratio, ex-dividend date, etc.)

-         Calculate/Understand different ratios (you can find financial ratios on most finance website, but understand how they are calculated is the first step to understand their meaning).

-         Understanding the basics of the economy (how interest rates will affect bond and preferred share values for example)

In order to build your investment knowledge toolbox, you can use different methods:

-         Read blogs (that will open your mind to different topics but keep in mind that bloggers are not professional advisors nor investment teachers)

-         Read financial statements and financial analyst comments (most brokerage accounts offer their firm’s financial analyst comments on stocks for free. This will help you to become familiar with financial language and the impact of different events on a company’s stock).

-         Go back to school (While getting a CFP or a CFA title seems a bit extreme, taking a few finance classes as a student may be interesting. Getting your license to become a broker could be interesting too).

-         Become a member of an investment club (this is where you will find tricks and ideas of where and how to invest. But keep in mind that as is the case with bloggers, being a investment club member doesn’t make you a profitable trader ).

While opening the brokerage account doesn’t make you an investor, having $1,000 to invest only makes you a potential market victim . Personally, I don’t like the strategy of buying 2 or 3 stocks with your $1,000 and wait to gather $300 to $500 to buy another one.

While it is true that you can build a dividend portfolio like this, trading fees (considering rebalancing your portfolio) will become very heavy.

I would consider building the core of a small portfolio with funds or ETFs and then, start looking for individual dividend stocks when you have $10,000 or more. With a $10,000 core in ETFs, you can take your next $500 or $1,000 to buy a dividend stock and it won’t affect your asset allocation enough so you have to rebalance after a year (unless your stock under or overperforms greatly!).

#3 Consider a virtual dividend portfolio

If you think you can handle the market right away, why not build your real dividend portfolio with ETFs and build a virtual portfolio on the side with stocks. After a year, you will be in a better position to understand your good and bad moves and will also be able to compare both strategies with “real” data.

Several financial websites such as Google Finance or Yahoo Finance offer to follow your virtual stock portfolio for free.

So, are you ready to trade stocks?

The bottom line of this post is that I consider that you need 3 key elements before trading individual dividend stocks;

#1 Financial knowledge

#2 The Size of your portfolio

#3 Experience in trading

Some people will take a few months before gathering the first two but we all learn something each time we make a trade . While those indicators will help you to make proper investing decisions, they are definitely not a gage of your success. However, you should be able to avoid major trading mistakes that cause you to lose most of your portfolio in a bad decision!

Image credit

• Investing With Less Than $1,000 Part2: How To Pick The Right Brokerage Account Before Investing
• Dividend Investing with Less Than $1,000 Part 3: How To Pick Your ETFs and/or Dividend Funds
• Market Timing; Being Right Without Being Wrong – Is It Possible?
• Launching DoNotWait.com – a Retirement Blog and Legal Concerns Over My Trading Account
• Open a Trading Account and Put $50 In Your Pocket Promotion