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How to start investing

Dear Dr. Don,
I am a first-time stock investor and I am thinking about purchasing Jet Blue shares. How many shares should I buy for the first time? I am conservative and don't have money to waste.
Derek Dirigible

Dear Derek,
Taking a flier on JetBlue Airways Corporation isn't necessarily a waste of money, but the investment doesn't quite fit with your portrayal of yourself as a conservative investor. The airline sector has taken wings over the past three quarters, providing investors with stratospheric returns, including JetBlue's year-to-date return of 118 percent -- and that's after the stock experienced some turbulence over the past few weeks when analysts downgraded the stock. You may be late to the party on this stock investment.

Stocks trade in round lots of 100 or in odd lots of less than 100 shares. A round lot of JetBlue would require an investment of about $5,919, given the stock price of $59.19 per share as of November 10th.

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Transaction costs are part of the expense when buying shares. Paying your broker a $20 commission on that 100-share purchase represents a transaction cost of less than one-half of 1 percent. Paying the same $20 commission on a 10-share purchase raises the transaction cost to more than 3 percent. That's just to buy the stock. You'll pay another commission when you sell the stock. When you have to earn more than 6 percent on your investment just to cover the commissions, it makes it that much harder to earn a return net of commissions.

I think there is a place in most investor's portfolios to take speculative risks. It should come after you've funded an emergency fund and started an investment plan to help you meet your financial goals such as retirement or college savings. Taking speculative risks when you're just starting an investment program is tempting, but like an athlete that skipped his warm up, you're more likely to get hurt.

My rule of thumb for investors who are just starting out is to diversify their portfolios. Try investing in an exchange traded fund (ETF) based on a stock market index like the Standard and Poor's 500 or the NASDAQ 100. Indexfunds.com provides a primer on index investing through ETFs or indexed mutual funds. Good luck.

-- Posted: Nov. 11, 2003

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