Trading stocks in a ROTH IRA

[Guest sgj]

Hi,

I have 3k in a 2002 Ameritrade Roth IRA.

Is the 3K I have a fixed amount that I cannot add to until 2003 comes and then at that time add up to another 3K?

So in 2002 I'm limited to 3K to trade with including broker fees.

thanks in advance,

sj

[John G]

I am assuming that the $3,000 was your initial contribution to your IRA an is therefore a calendar year 2002 contribution. If so, then if you expect to have sufficient earned income next year you may make a $3,000 contribution the first week of January.

You can only trade based upon the balance in your account, since your maximum annual contribution is a legal limitation. However, you should understand some serious limitations to what you propose. It is relatively hard and very inefficient to buy individual stocks with just $3k. First problem is that you get no diversification (you need to own 8-12 different kinds of companies to begin to be diversified). Second problem is that transaction costs (even with a discount broker) account for a large percent of your transactions. Third problem is that picking stocks takes a good amount of time and is hard to justify when you have only $3k to invest. All of the above are true to some extent even if you have $20k to invest. On the possitive side, you can learn a lot from the decisions you will make. Note, I do not recommend that you plunge into the market to buy shares in just one company hoping for a fast big return. "Lottery investing" is a oxymoron. But if you viewed your initial activities as "learning by doing" and were willing to tolerate losses (such as down 50% in one year), go ahead and plunge.

If you want to make your life a little simpler, pick one broad based NO LOAD mutual fund for the next few years. See the March issue of Consumer Reports for a good list. An index fund representing the broad market would be an excellant choice. When you assets grow to 20+K you may reconsider your choices.