Over the years, I've heard from many young people asking me for advice on how to get 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 get in the market and buy individual stocks, but they're not sure if they have enough money to put together a diversified portfolio.
Small numbers are OK
First of all, it's great that so many students manage to avoid being in debt after school. Student-loan debt is nothing to be ashamed of, and it's often at a relatively low interest rate. But credit card debt often commands rates of more than 20% per year in interest, which can increase your debt exponentially, in short order. (Here's how to dig out of debt if you need to.)
Once you're free of high-interest debt and you're ready to invest, you don't need much to start. Let's say you aim to own 10 or 12 individual stocks. You needn't buy them all at once. Start with one and add more as you're able.
In some cases, you can invest in each stock with as little as $50 or even 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 allow 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.)
Here are just some of many companies you can invest in directly:
Depending on which companies you choose, you can put even small sums to work with multiple stocks, building your portfolio regularly month after month.
But maybe you're sitting on, say, $3,000 or $5,000. Well, you could open a regular, traditional brokerage account and invest in stocks that way, 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.)
Consider also 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. Because you're young, they'll have an extra-long time to grow. If, for example, you're 25 right now and plan to retire at age 65, you have 40 years for your money to grow! That's enough to make most older people salivate ... or cry. Just $1,000 in an IRA today would grow to more than $45,000 at an average annual rate of 10%.
It might seem early to think about retirement, but if you sock away as much as you can in your 20s and 30s, you'll fall on your knees thanking yourself for that in your 50s and 60s. Let us help you -- visit our Retirement Center and also consider giving our Rule Your Retirement newsletter service a whirl. A free trial will give you access to all past issues, and the service even offers recommendations of stocks and funds.
Keep reading and learning. After all, the more you know, the better you're likely to do. Here are a few articles that can help you:
What advice would you offer to young investors? What do you wish someone had told you? Let us know in the comments section below.
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.