I read an interesting article in Money magazine the other day. The author, Michael Sivy, was explaining how you can jump into the stock market with less than $5,000. He made some very good points -- for example, that you don't need to be rich to invest. No six-figure nest eggs are required. Right on, Michael.
Still, I'm afraid I take issue with some of his other points, chief among them that you generally would want to buy 100 shares of any stock, as "buying fewer than 100 shares at a time usually results in higher commissions and other costs." To this, I say, "Pshaw!" I've bought fewer than 100 shares of a stock plenty of times, and have been charged by Ameritrade
Mr. Sivy explained, and I agree, that many investment strategies (including most Foolish ones, which you can learn more about via free samples of our various newsletters) would have you invest in at least a half-dozen stocks. That makes sense, because if you distribute your hard-earned money over very few investments, you're taking on a lot of risk, as the downfall of one would result in a big hit to your portfolio. Fortunately, even with just $5,000, you can distribute your money over a handful of stocks -- by buying fewer than 100 shares at a time.
Still, Mr. Sivy is right to urge us to mind the cost of commissions. Imagine that you want to invest in 10 different companies with $5,000, plunking about $500 into each. Let's also say that your brokerage charges you $25 per trade. If you're spending $25 to invest $500, you're down 5% from the get-go. That's not great. We've long recommended that you try to limit your commissions to 2% or less. If your brokerage, like mine, charges you $11 per market order, you'll be spending about 2.2% of your investment on commissions, which is much better. Better still might be to invest $600, which would bring the cost down to 1.8%. (Though, really, if you're just talking about an occasional small investment and a matter of a few dollars, I wouldn't recommend obsessing over the commission cost. Perhaps skip your daily Frappuccino for a day and call it even.)
Another great way to get into the stock market with limited funds is via dividend-reinvestment or direct-investing plans, known as Drips or DSPs. Learn more about these vehicles, which permit you to buy shares, or fractions of shares, for $50 or much less at a time. If you haven't considered adding dividend payers to your portfolio, you should do so. Learn more via a free sample of our Income Investor newsletter and in these articles:
You can learn more about how to select the best brokerage in our Broker Center, which also features info on some brokerages that have partnerships with the Fool.
These other Fool articles on brokerages may also be of interest:
- Which Brokerage Is Best?
- Brokerage Statement Bewilderment
- Don't Get Blindsided by Your Broker
- Rating the Low-Cost Brokerages
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.