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