You’ve no doubt heard that the sooner you get started building an investment portfolio, the more financially secure you are likely to be as you get older. But maybe you aren’t at a point where you can invest thousands of dollars in the stock market. Well, you don’t have to have lots of money to start. There are several ways to buy stocks for the small investor. All stock investments do carry some risk. However, these methods don’t require you to take huge risks with your savings.
Evaluate your financial goals. If you want investments that produce income, you'll want to concentrate on stocks that pay high dividends, even if they aren't likely to go up much in value. On the other hand, most small investors are more interested in increasing the size of their nest eggs and prefer to focus on the stocks of growth companies. If you don't have the time to do a through job of researching individual companies, consider starting with a stock mutual fund. You buy shares in the fund rather than individual companies. Research funds to find the best one for you, but this is usually easier than researching stocks and doesn't need to be an ongoing project.
Open an account with a discount/online broker. Be prepared to provide a valid photo ID and a statement of your income, employment and net worth. You can usually open an account online in minutes. Many good online brokers have investment accounts specifically designed for the small investor. For example, ShareBuilder.com offers plans with trades starting at $4 and no minimum initial investment. BuyandHold.com has plans with no required initial investment and low monthly fees (from $7 per month as of 2010) that allow you several free transactions each month.
Look for companies to invest in. Articles about specific corporations appear regularly in trade journals, industry newsletters and publications like Fortune and the Wall Street Journal. In fact, there’s so much information you may want to narrow your hunt for good investment prospects to just a few industries. One method many investors use is to focus on the industry in which they work, since their knowledge provides a headstart.
Study potential investments carefully. Once you identify an interesting company, go to the firm’s investor relations website. Most companies post annual reports, SEC filings and periodic updates that provide you with much of the information you need. However, don’t neglect to search for independent analysis in financial publications. While you’re at it, learn to interpret key information like P/E (price to earnings ratio), earnings reports and balance sheets.
Look again at the investor relations page to see if a company you’ve selected has a direct stock purchase program, or DSPP. With a DSPP, you buy shares directly from the company. The only purchase fees you pay are for a transfer agent to handle the transaction. These fees are usually less than even discount brokers charge – around $1 to $3 per transaction. Most DSPPs require initial investments of only $250 to $500. Even that is often waived if you agree to invest $25 to $50 each month through automatic debiting of your bank account. Nearly all of your money goes to buy stock, not to fees.
Open an investment account with a mutual fund if you decide the research to buy individual stocks is more than you want to tackle. Stock mutual funds are simply large, professionally-managed portfolios. If the stocks in the portfolio perform well, you get t e profit minus the fees the fund charges. Major mutual fund companies like Vanguard, T. Rowe Price and Charles Schwab offer many mutual funds, including funds with low initial investment requirements tailored to small investors. Most of the research required to evaluate a fund can be done by reading the fund prospectus, a document that details the funds terms, fees and performance history.