Tips for Small Investors to Buy Stocks
Small investors can establish financial independence through long-term planning. Your $100 monthly stock market investment may grow to $226,029 in 30 years, if it earns a 10 percent annual return. At the same rate of return, this $100 monthly investment becomes $632,331 in 40 years. As a small investor, long-term compounding should serve as motivation for you to find the best way to buy stocks.
For investment success, you will seek out low-cost avenues that allow you to dollar-cost-average into the stock market. Dollar-cost-averaging describes a long-term technique, where you invest money in small increments, rather than one lump sum amount. Therefore, you would invest $100 per month, instead of saving up to buy stock in one $10,000 block. In terms of costs, you are looking to keep trading commissions at less than 1 percent of your investment principal.
Dividend Reinvestment Plan (DRIP)
A dividend reinvestment plan (DRIP) is the best way for a smaller investor to buy into an individual stock. Large companies, such as ExxonMobil and Nike, provide paperwork for you to sign up for dividend reinvestment plans through their respective investor relations departments. Through a DRIP, you may purchase shares in $50 increments – with no trading costs. From there, you may opt to reinvest cash dividends back into buying additional shares of stock, or have them deposited into your bank account.
You may also open up an online trading account through a discount brokerage to buy stocks. As of 2010, discount brokerages, such as Scottrade and E-Trade, charge commissions of less than $10 per trade. To keep your online trading costs relatively low, you should be buying shares of stock in $1,000 blocks. Be advised that discount brokerage firms do not provide investment recommendations.
Stock market investments are not guaranteed. Stocks are especially volatile during economic recession – when business profits suffer. Further, any stock may ultimately collapse toward zero amid business bankruptcy. As a smaller investor, you may lack the expertise to research individual stocks in detail, which could result in large losses.
Through diversification, you can manage stock market risks, while also allowing for growth. The Securities and Exchange Commission says that mutual funds provide both instant diversification and professional money management. One mutual fund share features rights to a large asset pool, which may include dozens of different stocks. Fund managers oversee the asset pool, and trade shares at their discretion. Mutual fund shares are available for purchase directly from fund companies or through a broker.
Your 401(k) plan at work should also provide entry into the stock market with mutual funds. As part of your retirement plan, contributions into your 401(k) are tax-deductible. You may, however, owe a 10 percent penalty tax if you withdraw 401(k) money before age 59 ½.