Most people have heard that buying stocks will, over time, usually return more money than placing money in a savings account. But buying stocks can be intimidating for new investors, and the fees can eat up returns for those with only a few dollars to invest. Fortunately, there are ways to buy stocks without paying high fees: mutual funds and exchange traded funds (ETFs) are two of the most popular. For investors who really want to choose their stocks, there are also Dividend Reinvestment Plans (also called DRIPs) and Direct Stock Purchases (or DSPs).
If you are a new investor, you’ve probably done some research, and heard that you should diversify your stock investments. Diversification means that you buy stocks in companies that aren’t related to each other; for instance, Ford and Chevy are competitors in the car industry, and if you only bought those two stocks, then a downturn in the car industry would send both stocks down. But if you invested in companies in different industries, for example, one automotive stock and one banking stock, then one stock could go up even when one stock went down.
But if you only have a few dollars to invest, it doesn’t make sense to buy one or two shares of several companies. The reason is because brokers (people who buy and sell stocks on your behalf) will charge fees for each stock you buy and sell. When buying stocks for high dollar amounts, the fee (usually $7 to $15 for an online broker) is small. But if you only have a few hundred dollars to invest, and buy several different stocks at once, you’ll be charged a fee for each that may wipe out much of your profits. Plus, the fee is charged when you buy a stock, and again when you sell it; for investors with only a few dollars, that can turn profits into losses.
The easiest way to diversify while investing only a few dollars is to buy mutual funds or exchange traded funds (ETFs). Mutual funds and exchange traded funds pool money from lots of other investors and then buy shares of many different companies. Because they buy so many shares, mutual funds usually get a discount on fees from brokers, and so can keep their costs low. Best of all, you won’t pay for any of those broker fees yourself. Instead, the mutual fund charges a flat percentage fee (usually between 1% and 3%) to run the fund for everyone. By owning a share in a mutual fund, you’ll actually own a tiny sliver of dozens or hundreds of different companies that the fund bought with pooled money.
ETFs work the same way as mutual funds, except that you can buy and sell them on a stock exchange, just like a stock. Mutual fund shares are bought and sold only once a day, but ETFs can be bought and sold throughout the day. You will pay a brokerage fee to buy shares in an ETF, but just like a mutual fund, you won’t have to pay brokerage fees for all the different companies that the ETF buys and sells with your money. If you buy an ETF offered by your brokerage company (many online brokers offer their own ETFs), they will usually waive their brokerage fee.
For those new investors who really want to jump in and pick stocks, the best way to avoid broker fees is to use a Dividend Reinvestment Plan, or DRIP. Dividends are quarterly (every three months) or annual payments of profits to the holders of stock. When you buy a stock, you’ll be given the option to reinvest the dividends. If you select reinvest dividends, then each payment will go to buy more shares of the stock. Even if the payment isn’t enough to buy one share, when you reinvest dividends, you can receive fractional shares of the stock. No brokerage fee is charged for dividends. So if you are a new investor who decides to choose your own stocks, you should check to make sure those stocks pay dividends, and select “reinvest dividends” when you buy. That way, there will be no broker fee to purchase all the shares or fractions of shares bought with your dividends (you’ll still pay the usual flat fee to sell your shares).
More adventurous new investors can also buy stocks directly from corporations. Many large corporations, including McDonalds and AT&T, offer Direct Stock Purchase plans, or DSP plans. This is when you buy stock directly from the corporation, without going through a broker (and thus paying no broker fee). You’ll still need a broker to sell the stock, but with direct purchase plans, you can start investing in a company for the long-term without paying broker fees.
These are a few of the ways to start investing, even when you only have a few dollars to get started. As always, it is important to do your own research when embarking on any investment plan. Spend the time to learn and understand more about the stock market, and you will reap the benefits in the long run.