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Main Page Site Index Getting Pregnant Pregnancy Parenting Pregnancy and Parenting Journals Fertility Nutrition Pregnant Moms Morning Sickness Women's Health Child Health	A Beginning Investor - Part 1 by Gary Foreman Dear Dollar Stretcher, I have a minimal amount of monthly excess I'd like to invest. Aside from an automatic deduction from my paycheck that goes into a 401K, I have no investment experience. My goal is long-range investing (at least 10-years until my daughter starts college). Do I just call someone out of the phone book and ask to buy 10-shares of Coca-Cola stock? How do I get started without getting ripped off with broker fees? How do I even locate a broker? Maybe I need to start with a Mutual Fund?!? How do I learn the basics? Help! -- Karen C. Karen is not the only person asking this question. More people are beginning to wonder how they can begin an investment program. It's a good question and unfortunately most schools don't teach much in the way of personal financial management. So let's see if we can't get Karen started on the right track. It is possible to set up a successful investment program for the little guy. But, for the small investor, buying a few dollars worth of individual stocks every month or so is very difficult. Speaking as a former broker, I can tell you that the game is stacked against you. It's not some big conspiracy, but rather just the way the markets work. There are two additional costs to buying stock. The one is fairly obvious. That's the broker's commission. On some purchases you might not see a specific charge for commission. But, the broker and his or her firm does need to be paid. If you're dealing with a real, live person they receive part of the fee. The firm that handles the transaction needs to cover the cost of actually buying or selling the shares, keeping track of the transaction and have some profit left over.. Traditional commission schedules have changed radically with the invention of the discount and on-line broker. But even the deepest discounts don't eliminate the commission problem completely for the small investor. For instance, suppose you had $100 per month to invest and used a brokerage firm that only charged $10 for a trade of any size. That means that only $90 is actually going to buying stock. Let's further suppose that you did the same thing for five consecutive months, the stock price remained the same and you decided to sell. You would have bought $450 of stock ($90 x 5). When you sell it you would receive $460 ($450 minus $10 commission). So you've lost $60 on your $500 investment (a negative 12% return) on a stock that didn't go even down. I can hear some of you saying that you're going to pick winners. So look at it this way. Your stock needs to go up by more than 12% before you start making money. In our example your stock could go up 25% but you'd only see a 10.5% return after commissions. What about low priced and penny stocks? Isn't that where the little guy can make a killing? Maybe, but then again, maybe not. The second problem for the small investor is something called 'the spread'. On lower priced and over the counter stocks the broker will often trade the stock 'without commission'. That doesn't mean that they won't make anything. They'll earn the spread on the stock. That's the difference between the highest bid and the lowest offer to sell. Pretend you're at a garage sale. You see an item you'd like. The price tag's marked $5. That's that 'asked' price. You offer the owner $4.50. That's the 'bid' price. The difference is the spread. Buying and selling stocks works the same. Only, unlike the garage sale, there's no haggling. You will buy a stock at the 'asked' price, but when you go to sell you will get the 'bid' price. For higher priced stocks the difference between bid and asked is not usually significant. Take Coca Cola. The spread may only be twelve cents on an $80 stock. But on lower priced and especially penny stocks the difference can be important. How does that effect you? Suppose you paid $9 for a stock. Let's further assume that the stock doesn't go anywhere and you'd like to sell it. The current quote on the stock is 8 1/2 to 9. That means you'll only receive $8.50 per share. So you've lost 5.5% on a stock that really wasn't a loser. And the problem is even greater on a penny stock. There it's not unusual for a stock to have a bid of eight cents and an offer of nine. That's a spread of over 11%. Not an easy way to make money. The other thing to be aware of is that money tends to attract unscrupulous people. There are honest penny stock firms and brokers. But the bad guys know that the penny market is the easiest place to steal your money. That means you're more likely to find crooks in this casino. So what can Karen realistically do? Is it possible to put aside a few dollars regularly and invest them successfully? Sure! The safest, simplest and most affordable way for Karen to begin an investment program is with mutual funds. By using funds, especially no-load funds, she'll avoid commissions and the problem of spreads. They're wonderful for making small regular investments. Many funds are set up to take low initial purchases. It's not uncommon to find funds that will let you start with $100. Some will allow you to add as little as $25 to an existing account. Some are set up so you can have money transferred on a regular basis from your checking account. All want to make adding funds easy for you. Mutual funds also accomplish another important fundamental of investing. They spread risk between different companies and even different types of investments. Assembling a diversified portfolio of 10 to 15 stocks is pretty difficult when you're only investing a few dollars a month. Another advantage to using funds is that you won't need to spend a lot of time monitoring your investment. It's common for professionals to study five or ten companies before they find one they like enough to buy. That's too much research time for most individuals. You can monitor a portfolio of mutual funds in an hour or two a month. The funds also do a nice job of reinvesting your dividends. Many common stocks pay a quarterly dividend. It's easy for that money to 'disappear' into unplanned spending. The funds will allow you to have that money automatically reinvested. It's convenient and a great way to build your nest egg. A final advantage is that you'll delay your tax liability. Remember, if you sell a stock for a profit, you'll pay taxes on the gain. There aren't too many stocks that you'd buy and hold for more than a few years. With a fund you're much more likely to hold it for many years before selling and triggering the tax bill. By delaying you have more of your money working for you. Your money will grow faster. There's one last question to answer. That's how do you pick a mutual fund. And we'll answer that in part two of "The Beginning Investor". See you then! Gary is the editor of the Dollar Stretcher website. You'll find hundreds of free articles to help you save time and money. There's even a free weekly email newsletter. Visit today!