Here at The Motley Fool, we believe that just about every American should own stock -- even if it's just one share. Over the long term, owning a piece of a growing public company (or several) has been the best way to grow personal wealth.
However, we also recognize that not everyone has thousands of dollars lying around, ready to be invested in Microsoft
So we are often asked the following question: If one has limited savings, is it better to continue to save and invest in the market in a large sum, or to invest small amounts continuously and take the hit on commissions and fees?
Paying fees to Wall Street's Wise is the bane of existence for many a Fool. Undoubtedly, the more you pay in commissions, the less your long-term returns will be -- and the difference can be considerable.
However, the Internet has leveled the playing field significantly. In the world of full-service brokerage firms, commissions can range as high as hundreds of dollars. But deep-discount brokering on the Internet has made it possible to trade any amount of shares for as little as $10 or $8 -- sometimes even lower. (Check out our Discount Broker Center for tips on finding the best one for you.)
As a general rule, we want our commissions to be below 2% of the amount we invest. Conceivably, with an $8 commission, one could invest as little as $400 and still meet that guideline. Of course, if you save up and invest $1,000 on an $8 commission, that's only 0.8% -- sweet!
But there's another way to start investing without much cash at all. Direct investment plans allow you to buy stock directly from companies with little or no cost. More than 1,500 companies -- including corporations as diverse as Intel
After an initial start-up fee of about $15 (and sometimes a modest initial investment), most direct investment plans allow an investor to purchase shares of stock directly from a company in amounts ranging from $10 to $50,000 per month. Most plans are free of ongoing costs, so not only can you invest in small amounts at your own pace, but soon you could be done paying commissions for life.
Because they allow you to invest for minimal fees (or none) and you can invest small amounts at a time (even buying partial shares), direct investment plans allow you to take advantage of dollar-cost averaging -- a process for regularly buying stock in equal dollar amounts so that you buy more shares when prices are lower and fewer shares when they're higher. This can be a beautiful way to take advantage of market volatility. As a long-term investor, you can actually cheer for prices to drop so you can buy more stock each month.
Another way to dollar-cost average in the market as a whole would be to invest regularly in a low-fee index fund -- the only kind of stock fund we Fools really like. Once you enroll in such a fund (often there is a minimal investment requirement), you can usually invest as little as you want as often as you want for no charge. Later, as your Foolish fortune grows, you can open up that discount brokerage account and start buying stocks. Just remember to always keep your fees under 2% of the amount you're investing.
You might be thinking, how big a difference can a little 2% a year make if you're investing $10,000? Over a period of 50 years, it can cost you more than a million smackeroos! Check out the Mutual Fund Cost Calculator at the website of the Securities and Exchange Commission for a great demonstration of how little costs aren't so little over the long term.