When you buy stock in a company, you become a part-owner of that company, and are entitled to participate in its financial fortunes. You could make money or lose money on your stock. That's one reason the U.S. Securities and Exchange Commission advocates diversifying your stock portfolio across a number of different economic sectors and companies. While it might take time to develop a properly diversified stock portfolio, it doesn't take a lot of money to get started.
Back in the good old days, stocks were typically traded in round lots, or batches of 100 shares. You had to pay a premium to buy an odd lot, which was any number of shares less than 100. An investment in 100 shares of a $30 stock would require an outlay of $3,000 plus commissions, which was out of reach for many small investors. The advent of electronic trading and online brokerage firms has made the stock market accessible for even small investors to get started buying odd lots and even fractional shares of listed stocks. Some online brokerage firms offer stock trades with no minimum investment, although you'll have to pay the per-transaction commission fee, which varies from firm to firm. You can get started building your stock portfolio regardless of how much money you have to invest.
Direct Stock Purchase
Some companies offer a direct stock purchase plan which allows you to buy their stock directly without going through a broker or paying a commission to buy their stock. These plans typically offer the option of having any dividends paid by the stock automatically reinvested in additional shares of company stock. Each company sets a minimum initial investment, and they might also require a one time setup fee. For example, the Kellogg's Direct Stock Purchase and Dividend Reinvestment Plan allows investors to start with a $50 investment and a $15 set-up fee, while Best Buy requires a $500 minimum initial investment.
A stock portfolio is not a physical thing, or even a single account. It is merely a term that refers to all of the stocks you own. If you only own one stock, you still have a stock portfolio, albeit a risky one. There is much debate among financial advisers about how many stocks are required to make up a properly diversified portfolio, but unless you are a professional, having too many stocks in your portfolio might be more trouble than they are worth, according to Mad Money's Jim Cramer, who advocates having between five and 10 stocks in your portfolio. More than that requires too much attention, while fewer doesn't provide enough diversification. With an online account, you could create a diversified portfolio of five stocks for $125 plus commissions by investing as little as $25 per stock.
If you don't have the time, expertise or patience to create a diversified stock portfolio, investing in a mutual fund can do it for you. Each stock mutual fund share represents a pro rata share of the stocks of dozens or even hundreds of companies, selected and managed by investment professionals. Each mutual fund has its own minimum initial investment, which could range from $250 to $1,000 or more, but some mutual funds accept much lower investments, such as $25 or $50 for IRAs, or if you agree to an automatic investment plan.
- USA Today: Investing: How To Start With Just A Little Money
- MSN Money: Steps To A Suitable Portfolio
- American Association of Individual Investors: How Many Stocks Do You Need to Be Diversified?
- CNBC: How Many Stocks Should You Own at One Time?
- Computershare: Investment Plans
- Kellogg Company: Direct Stock Purchase and Dividend Reinvestment Plan
- Investor: Stocks
- Kiplinger: Getting Started With Stocks
- Securities and Exchange Commission: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.