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Advice for Young Investors

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Over the years, many young readers have asked me for advice on getting started with investing. Many of them are young graduates who've managed to avoid debt and are making money for the first time. They're looking to buy individual stocks, but they're not sure whether they have enough money to put together a diversified stock portfolio. If that sounds like you, good news -- starting to invest is easier than you think.

Small numbers are OK
First of all, it's great that so many students manage to avoid debt after graduation. Student-loan debt is nothing to be ashamed of, especially given its relatively low interest rates. In contrast, credit card debt often commands rates of more than 20% per year in interest, placing you much deeper in the hole to your creditors, much more quickly. (Sound too familiar? We've got advice on how to get yourself out of debt.)

Once you're free of high-interest debt and ready to invest, you don't need much to start. If you aim to own 10 or 12 different individual stocks, you can start with one and add more as you're able.

In some cases, you can invest in each stock with $50 or less, via "direct investing." Dividend reinvestment plans (often referred to as "Drips") and direct stock purchase plans (referred to as "DSPs" and "SPPs," among other things) let you invest in thousands of companies with small amounts of money. Your contributions buy small numbers of shares, or even fractions of shares.

With traditional Drips, you need to own one share of stock in your own name before you can add to that. With direct plans, you can buy your first share directly from the company. Both plans permit you to bypass brokerages and their commission fees. (However, these days, many brokerages charge very little in fees, and offer many excellent resources. Learn more from our broker collection.)

Among the many companies offering Drips or DSPs:

  • American Express (NYSE: AXP  )
  • PepsiCo (NYSE: PEP  )
  • Caterpillar (NYSE: CAT  )
  • Boeing (NYSE: BA  )
  • Yum Brands (NYSE: YUM  )
  • Dell (Nasdaq: DELL  )
  • Lockheed Martin (NYSE: LMT  )

Depending on which companies you choose, you can put even small sums to work with multiple stocks, building your portfolio regularly month after month.

Bigger numbers
Suppose you've got a slightly bigger wad of spare capital -- say, $3,000 or $5,000. You could open a regular, traditional brokerage account and start investing, without signing up for dividend reinvestment. (Reinvestment is often a powerful way to keep building your wealth, but it can add some bookkeeping headaches when you want to sell some or all of your shares -- you'll have to have good records of the purchase price of each.)

Alternately, consider setting up an IRA account with a brokerage. You'll be able to invest in the same stocks (and funds) as you can with a regular account, but you'll get some tax breaks with an IRA, and you'll be socking away valuable retirement dollars. Since you're young, your money will have an extra-long time to grow. Just $1,000 in an IRA today would grow to more than $45,000 in 40 years, assuming an average annual rate of 10%.

No time like the present
It might seem early to think about retirement now, but if you sock away as much as you can in your 20s and 30s, you'll thank yourself in your 50s and 60s. A visit to our Retirement Center can help you get started. And if you want to take things to the next level, consider giving Rule Your Retirement newsletter service a whirl. A free trial will give you access to all of our surprisingly non-boring past issues.

Most of all, keep reading and learning. The more you know about investing, the better you're likely to do.

American Express is a Motley Fool Inside Value pick. Pepsico is a Motley Fool Income Investor recommendation. Try our investing newsletter services free for 30 days.

This article was originally published on Oct. 27, 2008. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. The Motley Fool is Fools writing for Fools.


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2010, at 2:49 PM, edyboom223 wrote:

    Selena,

    It's hard to get young people to invest. I am 26, but I started when I was 23. I have only convinced 2 of my friends to start. They are all scared or think that they aren't smart enough. Thanks to the Fool, I have 3 separate accounts...IRA, Roth, and regulat taxable account. Thanks to the Fool, my IRA is up 130% in 13 months, my Roth is up 15% in 2.5 years, and my taxable account is up 40% in 2 years.

    Fool On

    Edyboom

  • Report this Comment On January 15, 2010, at 4:28 PM, PeyDaFool wrote:

    I am also 26 and started investing in July of 2009.

    My portfolio has about ten stocks, totaling about $10,000. My portfolio is up over 20% since I began investing last year and I'm contributing 40% of my pretax earnings into Roth IRAs, stock and emergency funds.

    This is great advice for young investors!

  • Report this Comment On February 15, 2011, at 4:28 PM, ejaimes1 wrote:

    Hey everyone. I always wanted to invest but never really have time. I understand that there are places like Sharebuilder, but I am so lost in it all. I want to get a ROTH (I will soon), but again, Im lost when it comes to actually purchasing stock. Any tips on reads or anything that may help me feel more comfortable?

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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