Dear Dr. Don,
I know nothing about investing but have a few dollars I would like to invest. I know what shares I want to buy. How do I get started without having to pay a stockbroker too much money? I want to keep my costs low so as to be able to purchase more shares.
— Vilma Investor
I’m going to skip the lecture on making sure you have an emergency fund in place before allocating funds to investing in the stock market. Instead, I’ll just focus on your goal of finding a low-cost way to invest in shares of stock.
I’m not a fan of dividend reinvestment programs, called DRIPs. With these programs, you buy small amounts of shares directly from the company. If you own at least one share of the company’s stock, you can reinvest the dividends with the company directly and avoid paying a stockbroker.
DRIPs commonly let you buy additional shares directly from the company, too. The reason I’m not a fan is that most programs have annual fees and transaction costs that can wind up being as expensive as trading shares online with a discount brokerage firm.
Discount brokerage firms offer different levels of service. But to keep the costs of trading down, you need to trade online. Online trades with these firms are less than $10 a trade. One barrier to using these accounts is the minimum initial deposit required by the firm.
Typically, these firms have no account maintenance fees, but you would want to confirm that with the firm. The big names in this area are Ameritrade, Charles Schwab, E-Trade, Fidelity and Scottrade. (Disclosure: I have brokerage accounts with Scottrade.)
You could also consider a ShareBuilder account because it allows trading in fractional shares as an alternative to a traditional discount brokerage account.
To learn more about investing, I’d suggest taking classes in Morningstar.com’s Investing Classroom. It’s free and will provide you with a good overview of investing basics. Good luck!
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