People on fixed incomes often don't have a lot of money to invest. However, the $100 investor does have several efficient options to get started in the stock market. The biggest obstacles are fees and account minimums. Luckily, brokerages and fund companies compete with each other by offering low fees and minimum investments. Also, you can participate in commission-free programs to purchase shares directly from the issuing corporation. A $100 investment is a good start -- if you can invest this amount monthly, you might be able to build a valuable portfolio.
Dividend Reinvestment Plans
Hundreds of companies have dividend reinvestment plans, or DRIPs, that allow you to purchase shares directly from the issuer for no fee. You may even be able to buy fractional shares. The transaction may take a couple of weeks to complete, and the price will be based on an average over a defined time period. One nice feature is that dividends are automatically reinvested in new shares. Over time, you can enroll in multiple DRIPs so that you can diversify your investment across many companies.
Low-Cost Mutual Funds
Several mutual fund companies skip the sales fees and welcome initial investments as low as $50. Often, these features are found in mutual fund individual retirement accounts. Whatever the size of your investment, buying into a mutual fund provides instant diversification, which lowers the risk that one poorly performing stock will wipe out your nest egg. Stock index mutual funds like the one offered by Vanguard and Fidelity have very low fees, as low as 0.20 percent of your investment. Mutual funds provide dividend reinvestment for free. In addition, you can also have capital gains reinvested. Check the offerings of different mutual fund companies online.
ETF are baskets of stocks, often tied to an index such as the S&P 500, that trade as a unit. You buy ETFs through a low-cost brokerage account. A typical charge is $4 per transaction, and ETF management fees are usually very low. TD Ameritrade offers commission-free ETF trading. Like mutual funds, ETFs provide instant diversification. The current trading price per share of an ETF is available from the market on which it trades. If the current price is $24 a share, you could buy four shares and still have enough left over to pay the commission.
If you're more of a gambler, you can buy out-of-the-money call options for a very low price. A call option gives you the right to buy 100 shares of a particular stock at a particular price -- the strike price -- on or before an expiration date. An OTM call is one in which the current stock price is well below the strike price. For instance, a three-month call with a strike price of $55 may sell for only $20 if the underlying stock is currently trading for $45 a share. If the stock should suddenly zoom higher during the three-month life of the call, the call price could dramatically rise, allowing you to sell the call at a profit. However, these are considered long-shot trades, and a complete loss is likely.
Video of the Day
- Building Wealth With $50: The 50 Best Dividend Stocks to Buy Without a Broker; Mkemo London
- Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less; Mike Piper
- Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad; Julie Jason
- Jupiterimages/Creatas/Getty Images