If you don't make a lot of money, investing in stocks might seem unrealistic. Brokerage firms, mutual funds and even individual companies offer investment accounts designed for the small investor. If you can put just $10 a week aside, you can start buying stocks.
Be a Thoughtful Investor
Do enough research to understand a company and you'll greatly improve your chances of choosing profitable stocks. In addition, learn to use investment strategies like dollar-cost averaging and diversification.
Legendary investment guru Warren Buffet provides some simple, yet useful advice: "Never invest in a business you can't understand."
Research Specific Stocks
- Read the company's annual report and current quarterly report. These documents contain a wealth of information useful to investors. Publicly traded firms routinely post them on their websites under "Investor Relations."
- Search for annual and quarterly company financial filings on the U.S. Securities and Exchange Commission's EDGAR website, and check sites such as Yahoo! Finance and MSN Money for more detailed current and historical financial information.
- Focus on the company's earnings history and profitability, as well as the strength of its management team.
- Compare the company to its competitors in terms of growth, market share and profitability.
Use Low-Cost Investment Strategies
- Take advantage of dollar-cost averaging. Stock prices fluctuate, and this strategy helps you manage the ups and downs while keeping investment amounts affordable. The idea is to invest a set dollar amount, even as small as $25.00, on a regular schedule such as once a month. When the stock price is up, you end up buying fewer shares. When the price dips, your money buys more shares.
- Diversify your investments. Diversification basically means making multiple investments in stocks that offset each other. For example, you'd buy shares in domestic companies along with shares in international companies, since these markets tend to move in opposite directions. This reduces your overall risk because it covers losses in some stocks with the gains in others.
Discount brokerage firms offer accounts designed for small investors that require just a few hundred dollars to start and sometimes have no minimum requirement at all. You can arrange to have a small amount deducted from a bank account periodically. These accounts work with small investment amounts because you are buying fractional shares. Suppose you want to buy a stock that costs $500 per share and you only have $100 in ready cash. You can purchase part of a share and add to your investment until it eventually adds up to a whole share.
Direct Investment Plans
Some corporations allow investors to buy stock directly from the transfer agent that handles their securities transactions. Known as Direct Investment Plans, many of these vehicles offer fractional shares and allow typical initial investments of $250 to $500, although the minimum requirement may be waived if you set up monthly debits from a bank account of $25 to $50. The fee for a purchase is low, and there may be no fee at all. DIPs usually include a Direct Reinvestment Plan. A DRIP allows you to reinvest your dividends into additional fractional shares at no charge. You can find contact information for a firm's transfer agent through the company's investor relations department on its website.
Mutual funds raise capital by selling shares to investors. The pool of capital thus created is used to buy a basket of stocks chosen by a professional fund manager. Some mutual funds require minimum investments of $1,000 and up, but others offer accounts that can be started for a few hundred dollars or less. Some funds allow you to dollar-cost average your investment through small monthly payments automatically debited from a bank account. For the beginning investor with limited capital, this is a way to buy stocks with just a little money while getting the benefit of a professionally managed portfolio. You don't have to research individual stocks -- that's the fund manager's job. To keep fees to a minimum, you can invest in a "no-load" fund with an account at the fund's company itself. Information about each mutual fund, including its performance history and fees, is made available in its annual prospectus. Mutual funds commonly make their prospectuses available on their website.
- Wall Street Journal: Stock Too Pricy? Try Partial Shares
- The Street: 10 Questions to Ask before You Buy a Stock
- Forbes: How to Invest Using Direct Stock Purchase Plans
- USA Today: Investing; How to Start with Just a Little Money
- Kiplinger: Great Funds You Can Own for $500 or Less
- U.S. News & World Report: New to Investing? Use Dollar-Cost Averaging
- U.S. News & World Report: Here’s Why Diversification Matters