Financial Barriers to Starting to Invest in Stocks

One of the most common reasons that people give for not investing is that they don't have enough cash to get started. There's some truth to this, at least from the perspective of traditional Wall Street. Unless you have thousands of dollars in your hand, most full-service brokers won't give you the time of day. And while discount brokers offer lower commissions than their full-service counterparts, they might still require a thousand dollars or more in order to open an account.

The advent of the Internet a decade ago did cause a flurry of new discount brokerage firms to spring up online with promises of cheap trades and low fees, but the industry has seen quite a lot of consolidation since then. Commissions have fluctuated, in recent years stabilizing arond the $10-$15 mark. But most brokers still require $1,000 or more to open an account. Inactivity fees (those fees charged to customers who don't make a certain minimum number of trades in a quarter or other period) have largely gone away, but you can expect other fees to take their place, such as charges for transferring shares in or out of your account, or for issuing stock certificates, or even for recording a dividend from an ADR in your account.

Here's a review of some of the major online brokerages, with the minimums required to open an account and the standard flat-rate commission for a new customer.

As you can see, you can open a brokerage account for $1,000 or less at several firms. That in itself might not be a barrier for many people, but it does present a problem of another sort. Commissions and fees take a bite out of your investment capital, putting you at an immediate loss whenever you buy a stock. For this reason, always keep costs as low as possible. My rule of thumb is to keep commissions and fees near or less than 1% of any investment you make.

If you take a look at the above table with this rule in mind, you'll see that Scottrade and Firstrade will let you open an account and buy a single stock with just $700. That still isn't making it easy for people on a budget to start investing. Even if you could set aside a couple of hundred dollars a month for an investment account, it would take years to build a diversified portfolio of just six or seven stocks sticking to the 1% rule.

There are alternatives. One traditional route is to invest in mutual funds. Many funds allow you to invest small amounts (such as $50 or $100) a month, as long as you commit to making the investment automatically. Many of the online brokerage firms also offer no-load funds to account holders, where you pay no commission ("load") when you purchase shares.

I don't want to get into the advantages and disadvantages of stocks versus funds, but this web site is called "StockCentral," after all, so I'm going to assume that you're here because you're interested in investing in stocks. And so we'll move on to discuss how to invest directly in stocks -- without a broker, and with as little as $100.

Doug:

You might want to mention our recent partner, FOLIOfn.

While I haven't checked it out recently, the last I knew you could open an account with little or no minimum balance and pay no fee, provided you execute at least three transactions per quarter at $4 per trade.

Their brokerage is especially beneficial to those who are just startingout because you purchase stocks in dollar values instead of shares. Because you can invest in fractional shares, you can take a small amount of money and divide it among as many stocks as you care to. Thus, you could invest $50 a month, for example, and divide it equally among ten or more stocks in your portfolio. (Of course, at $4 per trade, it would cost you $40 to do that, so it wouldn't be practical at that level. )

But there are several such "Folio" brokers, each with a slightly different deal. Perhaps you might devote some air time to this kind of approach.

There's really no catch to it. But the reason for the low price is the practice of "window trading." They go to market with their clients' orders twice a day. And, they fill as many of them as possible in house; i.e., they try to satisfy as many buy orders as possible with their sell orders. And, they pass on the savings to their clients with their low fees.

It's worth a peek at www.foliofn.com. They have several plans including one for $29 a month which gives unlimited trades, so if you anticipate more than 8 trades a month, it might pay to use that kind of deal.

I think that you're on the verge of stealing Douglas' punch line, Ellis.  The last sentence in the first session says ...

"And so we'll move on to discuss how to invest directly in stocks -- without a broker, and with as little as $100."

Yes, we'll have a copy of the entire workshop in our Learning Library at some point after it ends!

Doug

Ellis,

Foliofn also has a new unlimited pricing plan i.e. for a flat $290 per year, they allow unlimited folios with unlimited $0 commission window trades.  For other trades such as market, limit, etc., they charge $3 per trade.

Bakul

Doug,

I've been trying zecco.com with $2,500 for opening the account.  Commission cost for trades is $0. There are some limits such as no more than a certain number of trades per day/month.  Anyway, the user interface is much left to be desired. Past that issue, there is no cost of trading.

Bakul