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Stocks for the "Little Guy"
The Dollar Stretcher
by Gary Foreman
Dear Dollar Stretcher,
How do you purchase a small amount of stocks? Example: I saw stock for a local firm that sold for $21.50 a share. I have enough money to buy 10 shares. However, I have no idea how to go about buying the stock. Most brokers want you to have a $1,000 account with them. Is there any place for the "little" guy?
Priscilla's not the only one asking this question lately. As the stock markets continue to soar, more and more people want to get in on the ride. And many are doing it for the first time.
There are four different ways that Priscilla can participate in the stock market. Each has some advantages and drawbacks. Let's spend a few minutes and take a look at the different options available to her.
We'll begin with the most obvious answer. Buying stock through a broker. But, as Priscilla has already found out, they don't like small accounts. In fact, you'll find that most (if not all) of the firms that advertise low rates for trades have a minimum amount that's needed to open an account before you can buy or sell shares. And, typically, that minimum is about $1,000. The minimum can be made up of cash or the value of shares that you already own.
Naturally that's a problem for someone like Priscilla. Why do the brokerage firms do that? The reason is simple. They really don't want the 'little guy'. It may not be nice, but they can't make money on someone who's going to make an $8 trade today and another one in a year or so. Just the postage to send out quarterly statements will turn the account into a loser for them.
What's Priscilla to do? Well, she could deposit $1,000 in cash, stocks or bonds into the account. It's important that she check her new account agreement to see what happens if she dips below that magic $1,000 level. She might find herself wracking up service fees every month.
One type of firm often doesn't require minimums. That's the brokerage house that deals in so-called 'penny stocks'. Those are typically stocks that trade for less than $1.00 per share. The average investor is wise to avoid penny stocks. That market offers way too many opportunities for scam artists to take your money.
Another option would be to buy direct from the company that she's interested in. Some companies make it very easy for an individual to buy shares without using a broker. The quickest way to find out is to call the company and ask for 'investor relations'. Tell them what you want to do and ask if they can help.
Companies are willing to help an individual investor for a number of reasons. For some, it's a practice that they've carried on for years. Others want to have as many people as possible hold shares in the company. They feel that you're more likely to contact your elected representative on an issue that affects the company if you 'have a piece of the action'. That's especially true when the shareholder lives in the city where the company is headquartered.
But, buying is only half of the equation. You don't make money on a stock until you sell it. And very few companies will buy their shares back. So even if she does buy through the company, it could be difficult to sell the shares later.
If Priscilla is willing to look beyond a single company, there are some other ways that she could participate in the stock market. Joining an investment club might be a good choice. Most clubs work about the same. You agree to add a certain amount to your club account each month. The money from all members is put together and the group agrees on stocks to buy or sell. One real advantage of club membership is that a lot of learning can take place.
Finding a club is much easier than it used to be. The National Association of Investors Corporation (NAIC) is a non-profit organization the helps the individual investor. You can find them on the internet at www.better-investing.org or call them at 1-877-ASK-NAIC.
A final option for Priscilla is select one of the many mutual funds available. Many will accept an initial investment as small as $250 and account additions of $50 or more. While it may not be as much fun as picking a stock and following it's progress, a good mutual fund could begin a lifelong habit of saving and investing. To find a no-load fund with good historical performance, just look at one of the fund comparisons that the major news magazines do periodically.
Should Priscilla go forward with her plan to buy shares in the local company? Hard to say. Many people do well investing in local companies or in companies who make products they like.
But, Priscilla needs to remember that every stock doesn't go up. Even when the Dow Jones Average breaks records, there are some stocks that go down.
If Priscilla is serious about investing in individual stocks she might want to contact the American Association of Individual Investors. They're a not-for-profit group that provides education, information and research. She can find them on the internet at www.aaii.com or call 1-800-428-2244. Annual membership is $49 and includes a monthly magazine and also a yearly tax guide and mutual fund book.
The bottom line is that it's really pretty hard for the individual investor to buy $200 of a specific stock. Much as we all like to encourage the little guy, those who complete the transactions really don't want to be bothered with small trades.
Thanks to Priscilla for asking an interesting question. We hope that whatever choice she makes works well for her.
Gary is the Editor of The Dollar Stretcher website
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