Is the stock market “game” tough?

the_uninformed: Is the stock market “game” tough?
I’m planning on investing for the first time with 1k and I admit I’m a bit intimidated. I’m not looking for “mass profits” but just a general (small even) “income” if you know what I mean.

Answers and Views:

Answer by Alex
Only tough if you don’t know what your doing. Since you’re not investing a very big amount of money I would use a website like etrade to invest online. If you know what your doing maybe use something like Scottade. Covestor is easily the best though

Answer by John W
Really 1k isn’t a big investment and there isn’t much that can be done with such an amount. Pretty much the best you can do would be a low fee index fund giving you wide diversification.

Stock investment means an uncertain return as opposed to high grade bonds and CD’s which have defined returns so except for the small risk of default, high grade bonds and CD’s carry no risk. Whenever you have some risk, the approach is not to invest everything but to hold some risk free. The common advice is to invest half and keep the other half in cash or cash equivalents like bonds, that way if the market goes down, you take advantage of the low prices by rebalancing back to 50/50 and if the market goes up, you lock in your profits by rebalancing back to 50/50 effectively buying low and selling high.

If you actually know the probabilities and the possible outcomes then you could calculate the optimal amount to invest by what’s called the Kelly Criterion which basically maximizes the geometric mean of the outcomes. If you invest everything then the geometric mean outcome is always zero so long as there is some risk. For example, if you had a 50/50 coin toss at 2 to 1 payout odds where you won twice your wager plus received your wager back when you win and lost your wager when you lost, how much of your money would you wager on this favourable gamble? If you wager nothing, you assume no risk but you also do not benefit, if you wager everything you are only assuring that you will lose everything if you continued playing as eventually you will lose so what is the optimal. The optimal is that which optimizes for:

e^( “probability of a win” * ln( “total wealth if you win” ) + “probability of a loss” * ln( “total wealth if you lost” ) )

The Kelly Criterion itself is a simplification of maximizing the geometric mean of outcomes for a binary event like a coin toss and is simply the point at which the above equation is at a maximum. The Kelly equation is f = ( b * p – q ) / b where f is the fraction of your wealth to invest, b is the payout odds (2 in this case), p is the probability of a win and q is the probability of a loss.

In such a coin toss, the optimal wager is 25% of your net worth. Why isn’t it 100%? It’s not 100% because you could lose and if you lost it all, it’s game over hence the adage “Don’t bet the farm.”

Answer by Kenny
Can be extremely tough even if you do know what you are doing.

Keep your $ 1000 safely in the bank until you learn a bit more about investing. Try out virtual trading as that will give you a very good insight into it and if you lose, your money is still safely in the bank.